Article 1158; Obligations derived from law are not presumed requiring an employer to reimburse an employee for such

employee for such expenses. While

acknowledging that it might be in the employer's interest (e.g., in a case where
Article 1158. Obligations derived from law are not presumed. Only those the employee's negligence could lead to the employer's subsidiary liability), the
expressly determined in this Code or in special laws are demandable, and shall Court was “not prepared to say and to hold that the giving of said legal
be regulated by the precepts of the law which establishes them; and as to what assistance to its employees is a legal obligation.”
has not been foreseen, by the provisions of this Book. (1090)
Article 1159; Contract is the law between the parties
Pelayo vs. Lauron Dr. Pelayo provided medical services during a
difficult childbirth after being called by the patient's father and mother-in-law Article 1159. Obligations arising from contracts have the force of law between
(defendants_. The issue stemmed from the defendants' refusal to pay the the contracting parties and should be complied with in good faith. (1091a)
physician's fees for services rendered around October 13, 1906.
NGEI Multi-Purpose Cooperative Inc. vs. Filipinas Palmoil
The Supreme Court affirmed the decision absolving the defendants, Plantation Inc. NGEI Coop and FPPI entered into a lease agreement, later
ruling they were not liable for the fees. The Court explained that the legal extended by an Addendum executed on January 29, 1998. The problem arose
obligation to provide medical support rests on the husband, not the father and when NGEI Coop and Hernancito Ronquillo filed a complaint on June 20,
mother-in-law, who were considered strangers to this duty. Since no contract 2002, seeking to nullify the Addendum, claiming it was onerous, unjust, and
existed between the physician and the defendants, and the legal obligation was executed without proper authority.
placed elsewhere by law, an obligation on the defendants to pay could not be
presumed. The Supreme Court denied the petition and upheld the validity and
binding effect of the Addendum. Applying the doctrine that contract is the law
★​ Obligations arising from law are not presumed. Those expressly between the parties, the Court ruled that the Addendum was a valid and binding
determined in the code or in special laws, etc., are the only demandable contract, freely entered into. The terms unequivocally expressed in this
ones. agreement must govern their contractual relations, and its validity or
compliance cannot be left to the will of only one party, emphasizing the
De la Cruz vs. Northern Theatrical Ent. In this case, the relationship principle of mutuality of contracts. The Court found that the petitioners could
between Domingo de la Cruz and Northern Theatrical Enterprises Inc. was not unilaterally change or cancel the contract after its perfection and
determined by the Court to be a mere employer-employee arrangement, not performance.
principal-agent. The problem arose on July 4, 1941, when De la Cruz, a special
guard, shot a gate crasher in self-defense while performing his duties, leading to MBTC vs. Rosales The relevant contracts were the Joint Peso Account
criminal charges and expenses for a lawyer. De la Cruz sought reimbursement and Joint Dollar Account agreements, which the Court recognized as simple
for these legal expenses from his former employer. loans or mutuum. The problem arose on July 31, 2003, when the MBTC issued
a “Hold Out” order against the respondents' accounts, preventing them from
The Supreme Court ruled that the employer was not legally obligated to withdrawing their deposits. MBTC justified this based on suspicion of the
provide legal assistance or reimburse expenses for a criminal charge filed by employee's involvement in a fraudulent withdrawal of US$75,000.00 from
third parties. The courts found no specific law or judicial authority directly another account, leading to reimbursement and a criminal case.
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 The Supreme Court ruled that MBTC committed a breach of contract. In reciprocal obligations, neither party incurs in delay if the other does not
The Court held that the bank deposit contract obligates the bank to repay the comply or is not ready to comply in a proper manner with what is incumbent
funds upon demand. While the contract included a “Hold Out” clause, the Court upon him. From the moment one of the parties fulfills his obligation, delay by
found it did not apply because the bank failed to prove a valid obligation by the other begins. (1100a)
Rosales to the bank arising from law, contract, or quasi-contract. Thus, the
bank's actions violated the fundamental terms of the deposit agreement, which Liquidated and Demandable (Debt) — An obligation is considered
served as the law governing their relationship. liquidated when the amount or scope of what is due is determined or capable of
being determined. The term is often used in relation to damages. An obligation
★​ The “Hold Out” clause applies only if there is a valid and existing is considered due and demandable when the time for its fulfillment has arrived
obligation arising from any of the sources of obligation. and the creditor can legally require the debtor to perform it. Generally, for a
★​ The banking industry is impressed with public interest. As such, “the debtor to incur in delay (mora), which can make an obligation demandable, the
highest degree of diligence is expected, and high standards of integrity obligee must judicially or extrajudicially demand the fulfillment of the
and performance are even required of it. obligation.
★​ Banks must therefore treat the accounts of its depositors with
meticulous care and always have in mind the fiduciary nature of its General Milling Corporation vs. Ramos The General Milling
relationship with them. Corporation (GMC) entered into a Growers Contract with Spouses Librado and
Remedios Ramos in August 1989, secured by a real estate mortgage. When the
Article 1169, Default; Demand spouses failed to settle their account, GMC initiated extrajudicial foreclosure
proceedings beginning March 31, 1997, and sold the property at public auction
Article 1169. Those obliged to deliver or to do something incur in delay from on June 10, 1997. The central dispute was whether the foreclosure was valid
the time the obligee judicially or extrajudicially demands from them the despite the spouses' claim they were not properly notified or in default. Both
fulfillment of their obligation. lower courts found the foreclosure premature.

However, the demand by the creditor shall not be necessary in order that delay The Supreme Court affirmed, holding that GMC had not made a
may exist: sufficient demand for payment; its letters merely requested discussion, which is
not equivalent to a demand necessary to establish default. The core doctrine
(1)​ When the obligation or the law expressly so declare; or applied is that demand by the creditor is generally necessary for a debtor to be
(2)​ When from the nature and the circumstances of the obligation it in default, unless the obligation or law states otherwise. Foreclosure is only
appears that the designation of the time when the thing is to be valid when the debtor is in default. Since the contract did not waive the need for
delivered or the service is to be rendered was a controlling motive for demand, and the court found no sufficient demand was made, the obligation
the establishment of the contract; or was not yet due and demandable, rendering the foreclosure premature and void.
(3)​ When demand would be useless, as when the obligor has rendered it
beyond his power to perform. Santos Ventura Hocorma Foundation vs. Santos the central dispute
arose from a Compromise Agreement signed on October 26, 1990, where
Santos Ventura Hocorma Foundation (SVHFI) agreed to pay Santos P14.5
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Million, with a P13 Million balance due within two years, specifically by place the debtor in default, unless certain exceptions apply. Solar Harvest failed
October 26, 1992. SVHFI failed to pay the P13 Million balance by the deadline to prove it made a prior demand for the delivery of the boxes before demanding
and only settled it through auction sales much later. Santos and Riverland, Inc. reimbursement on January 3, 2001, thus failing to establish that Davao
(the auction buyer) sued for damages in the form of legal interest due to Corrugated was in default of its obligation to deliver.
SVHFI's delay in payment. SVHFI argued against paying interest, stating the
agreement didn't include it and Santos waived other claims. SSS vs. Moonwalk Development & Housing Corp. This case involved
a dispute arising from an interim loan agreement where SSS approved a loan
The Supreme Court ruled in favor of Santos and Riverland, affirming for P30,000,000.00 to Moonwalk Development & Housing Corporation for a
the appellate court's order for SVHFI to pay legal interest on the P13 million housing project. Out of this, P12,254,700.00 was released and covered by a
balance from the demand date until fully paid. The Court established that Third Amended Deed of First Mortgage. The central dispute was whether
debtors incur delay from the time the creditor demands fulfillment, either Moonwalk remained liable for over P7.5 million in penalties for delayed
judicially or extrajudicially. The two-year period ending October 26, 1992, payments, even though SSS had accepted Moonwalk's payment of the principal
made the obligation demandable and liquidated, and Santos's demand on and interest (P12,254,700.00 plus interest totaling over P15 million) and
October 28, 1992, put SVHFI in default. Delay in performance makes the released the mortgages in October 1979. SSS claimed its release of the
debtor liable for damages, typically legal interest at 12% per annum computed mortgages was a mistake and later demanded the penalties in November and
from the date of demand when the amount and payment period are known. The December 1979.
waiver clause only covered claims prior to the agreement, not damages for
breaches of the agreement itself. The Supreme Court ruled that Moonwalk was not liable for the
penalties because the principal obligation was extinguished by full payment in
Solar Harvest, Inc. vs. Davao Corrugated Carton Corporation The October 1979. The Court emphasized that a penal clause is merely an accessory
case stemmed from an unwritten agreement in the first quarter of 1998 for Solar obligation. The doctrine applied is that for a penalty to be demandable, the
Harvest, Inc. to purchase custom-designed carton boxes from Davao debtor must be in default, which for positive obligations generally requires a
Corrugated Carton Corporation for US$1.10 each. Solar Harvest paid judicial or extrajudicial demand by the creditor. Since SSS did not demand the
US$40,150.00 on March 31, 1998, as full payment. The central dispute was penalties before Moonwalk fully paid the principal loan and interest and the
whether Solar Harvest was entitled to a reimbursement (rescission of the mortgages were released in October 1979, Moonwalk was not in default of the
agreement) of the US$40,150.00 paid, alleging that Davao Corrugated failed to penalty obligation at that time, rendering the later demands ineffective.
manufacture and deliver the boxes. Davao Corrugated countered that the boxes
were completed by April 3, 1998, but Solar Harvest failed to pick them up. Cruz vs. Gruspe This case arose from a road accident on October 24,
1999, where a mini bus owned by Rodolfo G. Cruz collided with Atty. Delfin
The Supreme Court denied Solar Harvest's claim for reimbursement. It Gruspe's car, rendering it a total wreck. The next day, October 25, 1999, Cruz
found no sufficient evidence that Davao Corrugated breached the agreement; and Leonardo Ibias signed a Joint Affidavit of Undertaking, promising to
evidence suggested the boxes were made but not picked up or authorized for replace the car or pay its cost of ₱350,000.00 by November 15, 1999. It also
delivery by Solar Harvest. The doctrine highlighted is that the right to rescind a stipulated 12% interest per month for any delayed payment after the deadline.
reciprocal obligation due to non-compliance arises only when the other party is Cruz and Ibias failed to comply, leading Gruspe to file a complaint on
in default. Under Article 1169, demand by the creditor is generally necessary to
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November 19, 1999. The central dispute included whether demand was made Lorenzo Shipping Corp. vs. BJ Marthel Int’l. the central dispute
and when interest for delay should start. involved Lorenzo Shipping Corporation (petitioner) purchasing two cylinder
liners from BJ Marthel International, Inc. (respondent). Lorenzo Shipping
The Supreme Court ruled that while the undertaking was a valid claimed that time was of the essence in the contract and that BJ Marthel's
contract, interest could not accrue from the deadline (November 15, 1999) delivery on April 20, 1990, was late, justifying the cancellation of the contract
because Gruspe failed to prove a demand was made before filing the complaint. and refusal to pay. BJ Marthel sued for the value of the cylinder liners.
The doctrine applied is that default, which triggers liability for damages like
interest, generally requires a judicial or extrajudicial demand by the creditor. The Supreme Court ruled against Lorenzo Shipping, denying its
Since the complaint was the first proven demand, default occurred and interest petition and affirming the appellate court's decision ordering payment of
(reduced to 12% per annum) began only from its filing date (November 19, P954,000.00 plus interest. The Court held that time was not of the essence in
1999). the contract because the purchase orders did not specify a delivery date, despite
an earlier quotation mentioning a two-month period. In such cases, delivery
Rivera vs. Spouses Chua The case involved a Promissory Note dated must be made within a reasonable time. The Court found the delivery on April
February 24, 1995, where Rodrigo Rivera borrowed ₱120,000.00 from his 20, 1990, to be reasonable. Furthermore, receiving the cylinder liners on April
friends, Spouses Salvador and Violeta S. Chua. The note stipulated the payment 20, 1990, waived the claim of delay. Delay only incurs from the time the
was due on December 31, 1995. It also stated that failure to pay by this date obligee demands fulfillment.
meant Rivera agreed to pay 5% interest monthly "from the date of default".
Rivera failed to pay and the Spouses Chua filed a collection suit on June 11, Article 1170; Malicious delay; Contravention of tenor
1999. The central dispute was whether Rivera was in default and when interest
began to accrue, with Rivera claiming demand was necessary. Article 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the tenor
The Supreme Court ruled that Rivera was in default without need of thereof, are liable for damages. (1101)
prior demand. The doctrine applied is that while demand is generally required
to establish default, it is not necessary when the obligation expressly states a Bad Faith — A state of mind implying a dishonest purpose or moral
deadline for performance. The Promissory Note's explicit due date of December obliquity and conscious doing of wrong. Acted in bad faith. Purchasers are in
31, 1995, meant default automatically began on January 1, 1996. Therefore, bad faith if they fail to know or discover that the land sold is in adverse
Rivera was liable for damages (interest) from January 1, 1996, although the possession of another.
excessive 5% monthly interest was reduced to the legal rate (12% then 6% per
annum). ★​ Moral Damages — Damages recoverable in certain cases, including
acts contrary to morals, good customs, or public policy. Awarded for
★​ Promissory Note — A written instrument acknowledging a debt and mental suffering, sleepless nights, etc., caused by defendant's wrongful
containing a promise to pay a specific sum of money on demand or at a act or omission. Not recoverable simply for breach of contract, but
stated future date. May include stipulations for interest rates, subject to requires fraudulent or malicious conduct.
review or adjustment. Can contain escalation or de-escalation clauses.

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 ★​ Exemplary (Corrective) Damages — Damages awarded when a actions were remiss and its conduct “mercenary,” effectively contravening the
wrongful act is accompanied by bad faith or wanton, fraudulent, standard of good faith in its dealings and causing damage.
reckless, oppressive, or malevolent manner.
★​ Actual (Compensatory) Damages — Compensatory damages awarded Article 1174; Fortuitous event
for pecuniary loss that was duly proven.
★​ Liquidated Damages — Stipulated penalty can function as liquidated Article 1174. Except in cases expressly specified by the law, or when it is
damages. Additional sum agreed upon for delay. otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which
Telefast Communications/Phil. Wireless, Inc. vs. Castro, Sr. The could not be foreseen, or which, though foreseen, were inevitable. (1105a)
parties entered into a contract for the transmission of a telegram announcing a
death overseas. The problem arose when Telefast accepted payment but failed Feature Force Majeure (Caso Fortuito) Act of God
to send the telegram, resulting in the family in the United States not learning of
the death until after the burial. Telefast offered no evidence that it tried to Nature Extraordinary events. A type of event that is
inform the sender the telegram could not be transmitted. "occasioned exclusively by the
violence of nature"
The Supreme Court denied Telefast's appeal and upheld the award of Cause Can be an unforeseen and Occasioned exclusively by the
damages. The core doctrine is found in Article 1170, which holds liable for unexpected occurrence or failure violence of nature; all human
damages those who in performing obligations are guilty of negligence, delay, or of the debtor to comply, which agencies are to be excluded from
who contravene the tenor thereof. Telefast's failure to transmit the paid telegram must be independent of human creating or entering into the
will cause
was deemed a contravention of its contractual obligation amounting to gross
negligence, which proximately caused the family's suffering and justified the Conditions To constitute a fortuitous event (or To be exempt from liability for
award of moral damages. for force majeure) and exempt one loss because of an act of God,
Exemption from liability, the following the person must be free from any
RCBC vs. Court of Appeals This case involved a promissory note and from elements must concur: previous negligence or
Liability (a) the cause must be independent misconduct by which the loss or
chattel mortgage securing a car loan. The problem arose when RCBC claimed of human will; damage may have been
the debtor, Atty. Lustre, defaulted because one postdated check for an (b) it must be impossible to occasioned. If the event is found
installment payment was unsigned. RCBC debited and then re-credited the foresee the event, or if foreseen, to be partly the result of human
check amount, accepted subsequent payments, but later demanded the full impossible to avoid; participation (intervention,
balance plus damages without prompt notification regarding the unsigned (c) it must render performance neglect, or failure to act), the
impossible in a normal manner; occurrence is "humanized" and
check. (d) the obligor must be free from removed from the rules
any participation in aggravating applicable to acts of God
The Supreme Court ruled that RCBC's complaint for collection and the injury or loss
replevin lacked cause of action and held RCBC liable for damages to Atty.
Lustre. The doctrine applied stresses that delay requires malice or negligence.
While Atty. Lustre's omission was mere inadvertence, the Court found RCBC's
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 Effect of If negligence or misconduct When the negligence of a person
typhoon, does not exempt an obligor from liability if their own negligence
Negligence accompanies a fortuitous event, concurs with an act of God in contributed to the loss. The Court found NPC and Chavez guilty of patent gross
the person is not exempt from producing a loss, such person is and evident lack of foresight, imprudence and negligence in managing the dam
liability. The mere difficulty to not exempt from liability. by maintaining a high water level and suddenly releasing a large volume of
foresee is not impossibility to water, concluding that the event was not occasioned exclusively by an act of
foresee.
God.

Juntilla vs. Fontanar the central dispute was whether the owners and Mindex Resources vs. Morillo the dispute involved the lease of a cargo
driver of a public utility jeepney were liable to a passenger, Roberto Juntilla, truck by Mindex Resources from Ephraim Morillo. The truck was burned by
who was injured and lost his watch when a tire blew out causing the vehicle to unidentified persons while parked due to mechanical trouble. Mindex
turn turtle. The respondents Clemente Fontanar, Fernando Banzon, and Berfol Resources stopped paying rentals and claimed the burning was a fortuitous
Camoro, claimed the tire blow-out was a fortuitous event. event exempting them from liability for the loss and preventing them from
paying rent and repair costs. Morillo sued for unpaid rentals and the cost of
The Supreme Court reversed the lower court's ruling, finding the repairing the truck.
respondents liable and reinstating the award of damages, including P750 for the
watch and other amounts for injuries and lost salary. The Court held that while The Supreme Court held Mindex Resources liable for the unpaid
a tire blow-out can be a fortuitous event, it does not automatically exempt a rentals and repair costs. The Court found that while the burning might have
common carrier from liability, especially if there is evidence of negligence, been unforeseen, Mindex Resources failed to overcome the presumption of
such as speeding or overloading, which contributed to the accident. negligence against a lessee for the loss of a leased item. Because Mindex
Resources was negligent in leaving the truck unguarded at night in a place
★​ A caso fortuito must be independent of human will and the obligor kilometers away from the camp, the burning was not considered an act of God
must be free from fault. Negligence humanizes the occurrence and that would exempt them from responsibility for the loss.
removes it from the rules applicable to acts of God.
★​ For a fortuitous event to exempt one from liability, one must have
NPC v. Court of Appeals the central dispute involved claims for committed no negligence or misconduct that occasioned the loss.
damages by residents, including Gaudencio C. Rayo, et al., against the National
Power Corporation (NPC) and its plant supervisor Benjamin Chavez, for losses Metro Concast Steel Corporation vs. Allied Bank the central dispute
of life and property caused by the inundation of their town. The flooding on arose from Metro Concast's failure to pay various loan obligations to Allied
October 26-27, 1978, purportedly resulted from the negligent release of water Bank, documented by a promissory note and trust receipts. When sued for
from the Angat Dam spillways during typhoon “Kading.” The NPC invoked collection, Metro Concast claimed their inability to pay was a force majeure
fortuitous event (the typhoon and flood) as a defense. event because a buyer of their assets, Peakstar, defaulted on a separate
Memorandum of Agreement (MoA) to purchase scrap metal, thereby
The Supreme Court affirmed the appellate court's decision, holding preventing Metro Concast from receiving funds. Metro Concast argued Allied
NPC and Chavez jointly and severally liable for substantial actual and moral Bank was also bound by this MoA through an alleged agent.
damages. The Court reiterated the doctrine that a fortuitous event, like a

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 The Supreme Court affirmed Metro Concast's liability for the loan The Supreme Court ruled that the interest imposed by the CA was
obligations. The Court ruled that Peakstar's breach of the MoA was not a compensatory interest. However, the Court found that Sun Life was not liable
fortuitous event because it was foreseeable and not independent of human will. for compensatory interest because it had properly tendered the premium refund
Furthermore, the MoA concerning the asset sale was a separate agreement simultaneously with the notice of rescission. The Court clarified the doctrine
irrelevant to the distinct loan obligations with Allied Bank. The doctrine that compensatory interest is due only if the obligor fails to comply with their
reiterated is that for an event to be considered fortuitous, it must render it obligation or incurs delay. Since Sun Life did not incur delay and properly
impossible for the debtor to fulfill the obligation in a normal manner, among offered the refund, the Court found no basis for the interest. The Court ordered
other elements. Peakstar's breach was not an event independent of human will, the premium refund without initial interest, but stated that if Sun Life failed to
nor did it make it impossible for petitioners to fulfill their distinct loan pay within 15 days of the decision's finality, it would then be considered a
obligations to the bank. forbearance of credit, subject to 6% annual interest from that point.

★​ An event is fortuitous if it is independent of human will, impossible to ★​ Monetary interest Conventional interest in a simple loan of money. The
foresee or avoid, and renders performance impossible, payment constitutes the price or cost of the use of money. Must be
expressly stipulated in writing.
Article 1175; Interests to be imposed on obligations ★​ Compensatory interest is a penalty or indemnity for damages imposed
by law or the courts. Compensatory interest is due only if the obligor
Article 1175. Usurious transactions shall be governed by special laws. (n) fails to comply with their obligation or incurs delay.
​
★​ Interest due shall earn legal interest from the time of judicial demand Macalinao vs. BPI This case involved a dispute over a BPI
(Art. 2212). Stipulated interest rates or penalties, whether conventional Mastercard credit card agreement. Ileana Macalinao defaulted on her payments,
or compensatory, are subject to being reduced if found excessive, leading to a demand for payment from BPI. The central dispute revolved
iniquitous, unconscionable, or exorbitant. around the excessive interest and penalty charges imposed by BPI on
Macalinao's outstanding balance. BPI's terms stipulated a 3% monthly interest
Sunlife of Canada vs. Tan Kit This case concerned a life insurance and an additional 3% monthly penalty fee, totaling 6% per month or 72% per
policy issued by Sun Life of Canada (Philippines), Inc. to Norberto Tan Kit. annum. Although BPI initially sought a higher rate in court, lower courts and
The core dispute arose when Sun Life denied the claim filed by the beneficiary the CA debated whether the rate should be 2% or 3% per month.
(Sandra Tan Kit) after Norberto's death, alleging that he had concealed his
smoking history in his application. The insurance contract was rescinded by The Supreme Court ruled that the stipulated rate of 3% per month
Sun Life, which then offered to refund the premium paid. The beneficiary (translating to 36% per annum) was excessive and unconscionable. The Court
refused the refund and pursued the insurance proceeds. While the Court of reiterated the doctrine that interest rates of 3% per month and higher are
Appeals upheld Sun Life's right to rescind due to concealment and ordered the considered iniquitous and void for being contrary to morals. Drawing on Article
premium refund, it also imposed a 12% annual interest from the time of the 1229 of the Civil Code, the Court held that courts may equitably reduce such
insured's death. Sun Life appealed the imposition of this interest. penalties, especially considering Macalinao had made partial payments.
Consequently, the Supreme Court reduced the interest rate and penalty charge
combined to 2% per month or 24% per annum.
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 surety bonds. RCBC contended that liability for interest arose not from the
★​ Since the stipulation on the interest rate is void, it is as if there was no contract but from CIC's delay in payment, supported by law.
express contract thereon. Hence, courts may reduce the interest rate as
reason and equity demand. The Supreme Court affirmed the appellate court's decision, ruling that
★​ Contract of adhesion — A contract where terms are prepared by one CIC was indeed liable for the legal interest. The doctrine established is that a
party, and the other merely signs, signifying adherence. Such contracts surety's liability for interest stems from its default and the necessity of judicial
are not void in themselves (per se) but are strictly construed against the collection, not the suretyship contract itself. This legal liability for damages due
party who prepared them if the terms are obscure or ambiguous. The to delay means the surety can be required to pay interest even if the total
party adhering is free to reject it entirely. amount exceeds the principal obligation or the bond amount. Since the
obligation was a loan or forbearance of money and no interest rate was agreed
Spouses Solangon vs. Salazar Spouses Danilo Solangon and Ursula upon in writing, the applicable legal interest rate was 12% per annum from the
Solangon mortgaged their property to Jose Avelino Salazar to secure loans. The time of extrajudicial demand. CIC's failure to pay the remaining balance despite
dispute centered on the number of loans obtained and the validity of the third demands was considered unreasonable delay.
mortgage, particularly the stipulated interest rate of 6% per month or 72% per
annum. The Spouses Solangon argued this rate was unconscionable. Salazar ★​ Legal Interest — The interest rate prescribed by statute. In the absence
claimed there were three separate loans, and the third one was unpaid. The case of a stipulated interest rate in a loan of money, the legal rate applies.
involved real estate mortgages securing loan obligations. While the Court found Currently 6% per annum for loans/forbearance of money (since July 1,
no error in the lower court's finding of separate loans and the validity of the 2013). Prior to July 1, 2013, the rate was 12% per annum for
mortgage, it addressed the issue of the interest rate. loans/forbearance.
★​ In obligations not constituting a loan or forbearance, the legal rate on
Drawing on jurisprudence, the Supreme Court held that while the damages is generally 6% per annum.
repeal of the Usury Law allows parties to agree on interest rates, this freedom is
not absolute. The courts can still reduce interest rates if they are found to be Lara’s Gifts & Decors, Inc. vs. Midtown Industrial Sales, Inc. The
iniquitous, unconscionable, or exorbitant. The stipulated rate of 72% per annum contract was a sale of industrial and construction materials on a 60-day credit
was deemed “outrageous and inordinate” and contrary to morals. Therefore, the term from Midtown Industrial Sales, Inc. Midtown sued for unpaid purchases,
Court modified the decision by reducing the interest rate to 12% per annum, while Lara's Gifts claimed the materials were substandard. The agreement
which it considered a fair and reasonable rate in this context. included a stipulated 24% per annum charge on overdue accounts. The RTC
and CA found insufficient evidence of substandard materials and upheld the
Commonwealth Insurance Corp. vs. Court of Appeals Rizal 24% interest, ordering Lara's Gifts to pay the principal plus the stipulated
Commercial Banking Corporation (RCBC) granted loans to JIGS and ELBA, interest. The Supreme Court initially affirmed the 24% interest and additionally
which were secured by surety bonds issued by CIC). JIGS and ELBA defaulted imposed legal interest on the accrued compensatory interest.
on their loan payments. RCBC demanded payment from CIC as the surety. CIC
made partial payments but failed to pay the full remaining balance. The central The Supreme Court upheld the lower courts' finding that Lara's Gifts
dispute revolved around whether CIC was liable to pay interest on the unpaid failed to prove the materials were substandard. The Court affirmed the validity
balance, which would cause its total liability to exceed the face value of the of the stipulated 24% interest, finding it was not unconscionable. This 24% was
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characterized as compensatory interest for default on a credit sale, distinct from modified the awarded interest rate. It clarified that the contract was one for
a loan or forbearance of money. However, upon reconsideration, the Court construction services, not a loan or forbearance of money. According to the
deleted the award of legal interest on the accrued 24% compensatory interest. governing doctrine, obligations not constituting loans or forbearance of money
This was based on the procedural rule that the original trial court judgment had are subject to a legal interest rate of 6% per annum for damages due to delay,
become final and executory as to Midtown, who did not appeal the absence of absent a stipulation. The Supreme Court thus imposed the 6% annual interest
interest on interest. The final ruling ordered Lara's Gifts to pay the principal rate, computed from the date FSI made an extrajudicial demand for payment.
amount plus the 24% compensatory interest from the date of extrajudicial
demand. ★​ A loan or forbearance of money, goods or credit is an obligation
consisting in the payment of a sum of money. When the debtor incurs
★​ If there is a penal clause stipulating the penalty/indemnity, that in delay, interest applies as damages.
stipulated penalty/indemnity shall apply. ○​ describes a contractual obligation whereby a lender or creditor
★​ If there is no penal clause, but there is a stipulation on has refrained during a given period from requiring the
conventional/monetary interest, that conventional/monetary interest borrower or debtor to repay the loan or debt then due and
shall be applicable. payable.
★​ If there is no stipulation on penalty or conventional interest, the legal
interest rate shall be applicable. Article 1180; Fixing of term
★​ “Interest on interest" is fixed by law. In the absence of a contractual
stipulation between the parties on the rate of interest on accrued Article 1180. When the debtor binds himself to pay when his means permit him
interest, the legal rate shall apply by operation of law. Its imposition is to do so, the obligation shall be deemed to be one with a period, subject to the
not subject to the court's discretionary power. provisions of article 1197. (n)

Federal Builders vs. Foundation Specialist The dispute arose from a Tiglao vs. Manila Railroad 98 Phil. 181 Ciriaco Tiglao and other
subcontract agreement where Foundation Specialists, Inc. (FSI) was hired by retired employees sued the Manila Railroad Company for P7,275 in unpaid
Federal Builders, Inc. (FBI) to construct parts of the Trafalgar Plaza. FSI sued salary differentials. Their claim arose from a memorandum of agreement
FBI for failing to pay Billings No. 3 and 4 after completing 97% of the standardizing salaries, The agreement stipulated that after an initial payment
contracted work. FBI counterclaimed, alleging FSI's work was defective and from a P400,000 appropriation, the remaining differentials would be paid
incomplete, causing delays and costs for remedial work. The Regional Trial “when funds for the purpose are available.” Plaintiffs were entitled to the
Court (RTC) and Court of Appeals (CA) ruled in favor of FSI, ordering FBI to balance, but it remained unpaid because the initial appropriation was exhausted.
pay the unpaid amount and rejecting FBI's counterclaim. The CA also imposed The Manila Railroad Company refused payment, arguing that due to its
a 12% annual interest rate on the unpaid amount, applying the rule for loans or business losses, funds were not available, making payment conditional.
forbearance of money.
The Supreme Court found that the “funds available” clause meant the
The Supreme Court affirmed the lower courts’ findings that FSI payment depended on the company's judgment in allocating resources, not
substantially completed its work. The FSI was entitled to payment, finding that merely its overall financial state or profits, as it was not bankrupt. This
any delays or issues were due to FBI's own actions. However, the Court interpreted the obligation as one with a term whose duration is left to the will of
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the debtor, not a strict suspensive condition dependent on profits. Under Article
1197 (formerly 1128) of the Civil Code, the duration of such a term may be ★​ When a contract is subject to a suspensive condition, its effectiveness
fixed by the courts. To prevent multiplicity of suits and delay, especially for the depends entirely on the condition happening.
low-salaried plaintiffs, the Court affirmed that the period could be fixed and ★​ If the suspensive condition does not take place, the conditional
payment ordered in the same action. Instead of accruing from the date the obligation effectively never existed, and neither party can demand
action was filed, interest would begin only upon the defendant’s performance from the other.
default—specifically, if the principal amount of was not paid within the
one-year period set by the lower court. Heirs of Paulino Atienza vs. Espidol The contract was a “Kasunduan
sa Pagbibili ng Lupa na may Paunang-Bayad” (Contract to Sell Land with a
Article 1181; Suspensive and resolutory condition Down Payment). The Atienzas, who owned land acquired under the land
reform program, entered into this agreement with Espidol on August 12, 2002,
Article 1181. In conditional obligations, the acquisition of rights, as well as the for a total price of ₱2,854,670.00 payable in three installments. Espidol paid the
extinguishment or loss of those already acquired, shall depend upon the down payment but failed to pay the second installment of ₱1,750,000.00 due in
happening of the event which constitutes the condition. (1114) December 2002. The Atienzas sought to annul the contract due to this
non-payment.
★​ Suspensive Condition — The birth or effectivity of the obligation
depends upon the condition happening or being fulfilled. If it doesn't The Supreme Court ruled that the contract was a contract to sell,
happen, the parties stand as if the conditional obligation never existed. declared it cancelled, and held the sellers' obligation to be non-existent. In a
★​ Resolutory Condition — Upon fulfillment of the condition, rights contract to sell, the full payment of the price is a positive suspensive condition
already acquired will be extinguished. Non-payment in a contract of for the seller's obligation to convey title to arise. Since Espidol failed to pay the
sale is an example. installment when it was due in December 2002, the suspensive condition did
not arise, and the Atienzas' obligation to sell did not become effective.
Javier vs. Court of Appeals On February 28, 1966, Jose M. Javier and Therefore, the Court declared the contract cancelled and the Atienzas'
Estrella F. Javier entered into an “Agreement” with Leonardo Tiro concerning obligation under it non-existent. Espidol was ordered to be reimbursed the
the transfer of Tiro's rights over an additional forest concession area he had ₱130,000.00 paid. The buyer's full payment of the price was a positive
applied for, conditioned on the approval of this additional area by the Bureau of suspensive condition to the seller's obligation to transfer ownership. Since the
Forestry. The agreement stipulated that the Javiers would pay Tiro P30,000 “as buyer failed to fulfill this condition, the seller's obligation to sell never arose,
soon as said additional area is approved and transferred to TIMBERWEALTH and the contract became ineffective.
CORPORATION.” The central dispute regarding this agreement was whether
the Javiers were liable for the P30,000 despite the Bureau of Forestry never ★​ Contract to Sell — A contract where ownership is, by agreement,
approving Tiro's application for the additional area. retained by the seller and is not to pass to the vendee until full payment
of the purchase price. Full payment of the price is a positive suspensive
The Supreme Court held that the second agreement was without force condition. The seller's obligation to sell becomes demandable upon full
and effect. This was because the efficacy of the agreement was subject to a payment. If the suspensive condition is not fulfilled, the obligation to
suspensive condition (the approval of the additional area) that did not happen. sell does not arise, and the seller retains ownership.
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 ★​ Contract of Sale — A contract where one party obligates himself to George L. Parks, who bought the land from the original donors in 1921, sought
transfer ownership and deliver a determinate thing, and the other to pay to annul the donation.
a price certain. Title to the property passes to the buyer upon delivery
of the thing sold. A sale is perfected when there is a meeting of minds The Supreme Court affirmed the dismissal of Parks’ complaint, ruling
upon the thing and the price. From this moment, parties can he had no right of action. The Court reasoned that the donors had already
reciprocally demand performance. transferred ownership to the municipality via donation before selling to Parks,
and the donation had not been judicially revoked at that time. It was held that
Central Phil. University vs. Court of Appeals The contract was a deed the condition to commence work was not a condition precedent because the
of donation of land from Don Ramon Lopez, Sr. to Central Philippine donee municipality acquired title upon acceptance of the donation. While
University (CPU) in 1939. The heirs of the donor, the private respondents, filed non-compliance with such a subsequent condition could be cause for
an action in 1989 alleging that CPU had failed to comply with the conditions, revocation, the action for revocation is prescriptible. Applying the law on
specifically the exclusive use of the land for a medical college and the erection contracts to this onerous donation, the ten-year prescription period applied.
of necessary buildings. Since the cause of action arose in April 1911 (six months after donation), the
action filed in July 1924 was barred by prescription.
The Supreme Court ultimately ruled that CPU failed to comply with
the conditions and ordered the reconveyance of the property to the donor's ★​ Onerous Contract — A contract in which the donor imposes a
heirs. The Court found the donation was onerous, imposing obligations upon prestation upon the donee, such as obligations, charges, or burdens.
the donee. It held that the condition to establish a medical college was a
resolutory condition, meaning non-compliance results in the donation's Article 1182; Potestative, casual and mixed conditions
revocation and loss of the donee's rights. The Court determined that fifty years
was more than a reasonable period for compliance, and since CPU failed to do Article 1182. When the fulfillment of the condition depends upon the sole will of
so, the donation was ineffective and revoked. The argument for prescription the debtor, the conditional obligation shall be void. If it depends upon chance
was rejected because the time for compliance depended on the donee's will, but or upon the will of a third person, the obligation shall take effect in conformity
an unreasonable time had clearly passed. CPU was ordered to reconvey the with the provisions of this Code. (1115)
property to the heirs.
★​ A potestative condition depends upon the sole will of the debtor. A
★​ The annotations in the deed contained resolutory conditions, meaning suspensive conditional obligation shall be void if its fulfillment
that the donee's failure to fulfill them extinguished its rights and made depends upon the exclusive will of the debtor because it is usually not
the donation revocable. meant to be fulfilled and would sanction illusory obligations. However,
if the condition is imposed not on the birth but on the fulfillment of an
Parks vs. Province of Tarlac The contract was a donation of land from already existing obligation, only the condition is void, not the
Concepcion Cirer and James Hill to the municipality of Tarlac. The problem obligation itself.
arose when the municipality allegedly failed to use the land for a central school ★​ A mixed condition depends not on the will of one party alone but also
and public park and commence work within six months as stipulated. Plaintiff on third persons, chance, or other circumstances.

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 Vda. De Mistica vs. Naguiat involved a “Kasulatan sa Pagbibilihan,” The Supreme Court affirmed the dismissal of the claim, finding that the
interpreted by the Court as a contract to sell a portion of land. The total price payment condition depended upon Damasa Crisostomo's sole will. Drawing on
was P20,000.00, with a P2,000.00 downpayment. The remaining P18,000.00 Article 1115 of the old Civil Code, the Court held that a conditional obligation
was to be paid by Bernardino Naguiat within ten years from the date of the depending upon the exclusive will of the debtor is void. A condition facultative
agreement. Crucially, the contract stipulated that “[i]f the buyer fails to pay as to the debtor renders the whole obligation void. Thus, the obligation to pay
within the agreed period, the BUYER shall pay interest of 12% per year... until the subscription was void because the payment depended on Damasa's
fully paid.” Eulalio Mistica died in October 1986. His successor, Fidela del unilateral act of catching fish.
Castillo Vda. De Mistica, filed a complaint for rescission on December 4, 1991,
arguing that the failure to pay the balance within the ten-year period was a Romero vs. Court of Appeals the central dispute arose from a Deed of
violation of the contract. Bernardino Naguiat and his spouse contended the Conditional Sale of a parcel of land between the vendor, Enriqueta Chua vda.
contract allowed payment with interest beyond the ten years. de Ongsiong, and the vendee, Virgilio R. Romero. A key stipulated condition
required the vendor to evict squatters from the property within 60 days from
The Supreme Court affirmed the denial of rescission, finding the failure June 9, 1988. When the vendor failed to meet this deadline, she sought to return
to pay within the initial period was not a substantial breach because the contract the initial P50,000 payment and retain the property, arguing the contract was
provided for payment with interest thereafter. The Court reasoned that failure to voided. The vendee, Romero, refused the return, expressing willingness to
pay within the ten years was not a substantial breach because the contract itself cover eviction expenses and proceed with the sale.
provided for payment with 12% interest after the stipulated period. Stipulation
allowing later payment with interest indicated that the lapse of the period did The Supreme Court ruled that the vendor, failed to fulfill her obligation
not automatically cause forfeiture or rescission. The Court rejected the to evict the squatters). Therefore, she was not the injured party so she could not
argument that this made the obligation purely potestative, clarifying that the demand rescission. The Court classified the condition of removing squatters as
interest clause indicated the parties' intent to allow payment beyond the period. mixed, depending on the vendor, squatters, and government agencies. When a
The condition relating to payment timing was not solely dependent on the condition is on the fulfillment of an obligation, not the contract's birth, the
buyer’s will in a manner that would void the obligation. injured party has options, including waiving the condition. Ultimately, the
Court reversed the appellate court, ordering Romero to pay the balance and
Trillana vs. Quezon College, Inc. This case involved a claim by Ongsiong to execute the deed of sale.
Quezon College, Inc. against the estate of Damasa Crisostomo for payment of a
stock subscription. On June 1, 1948, Damasa Crisostomo sent a letter to the Santos vs. Court of Appeals involved a dispute over a house and lot
College subscribing to 200 shares with a par value of P100 each, totaling informally sold between the vendors, Sps. Santos, and the vendees, Sps.
P20,000. She stated no initial payment was enclosed and that she would pay the Caseda. A key condition was the Casedas' obligation to pay the balance of the
total amount “pagkatapos na ako ay makapag-pahuli ng isda” (after I have purchase price and liquidate the mortgage loan by June 16, 1987. The Casedas
caused fish to be caught). Damasa Crisostomo died on October 26, 1948, with made initial payments and took possession but failed to fully pay by the
no payment having been made on the subscription. Quezon College, Inc. deadline due to bankruptcy. The Santoses repossessed the property in January
presented a claim for collection in her testate proceeding, which was opposed 1989. When the Casedas later offered to pay, the Santoses demanded a higher
by the administrator, Nazario Trillana. price, leading to the Casedas' lawsuit for specific performance.

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 The Supreme Court determined that the agreement was a contract to merged with BDO, effective May 31, 2007, with EPCIB shares being converted
sell, not a contract of sale, primarily because ownership was reserved by the into BDO shares.
vendor until full payment of the purchase price. The doctrine applied is that in a
contract to sell, payment of the price is a positive suspensive condition, and the The Supreme Court dismissed the petition and ruled that the case had
failure of this condition prevents the vendor's obligation to convey title from become moot and academic due to a merger between BDO and EPCIB. The
becoming effective. The Court held that the Santoses’ act of repossessing the original EPCIB shares subject to the dispute were effectively lost or inexistent
property upon the buyers' non-payment was deemed an enforcement of the due to the merger and conversion into BDO shares, making the original sale
contract, not a rescission requiring judicial action. The Supreme Court reversed plan impossible to implement. Applying the doctrine that an obligation to give
the Court of Appeals and reinstated the trial court's dismissal of the Casedas' a determinate thing is extinguished if the object is lost without the debtor's
complaint. fault, the Court found the subject shares were legally “unrecoverable,”
rendering the planned sale impossible to implement. The impossibility of
★​ In a contract to sell, payment is a positive suspensive condition; its performing the vendor's obligation due to the legal loss of the object effectively
non-fulfillment prevents the vendor's obligation to convey title from removed the subject matter of the planned transaction.
becoming effective.
Article 1191; Rescission of reciprocal obligations
Article 1189; Suspensive condition; lost of the thing due
Article 1191. The power to rescind obligations is implied in reciprocal ones, in
Article 1189. When the conditions have been imposed with the intention of case one of the obligors should not comply with what is incumbent upon him.
suspending the efficacy of an obligation to give, the following rules shall be
observed in case of the improvement, loss or deterioration of the thing during The injured party may choose between the fulfillment and the rescission of the
the pendency of the condition: obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
(1) If the thing is lost without the fault of the debtor, the obligation shall be impossible.
extinguished;
Rescission (or Resolution) — implied in reciprocal ones, in case one
Osmena III vs. SSS Senator Sergio R. Osmeña III, challenged the obligor does not comply. The injured party may choose between fulfillment and
Social Security System (SSS)'s decision to sell its shares in Equitable PCI Bank rescission, with damages. May seek rescission even after choosing fulfillment, if
(EPCIB) using a Swiss Challenge bidding procedure, approved by SSC fulfillment becomes impossible. Rescission requires substantial and
Resolutions No. 428 and 485 in July and August 2004. The SSS had previously fundamental breach of the contract. Slight or casual breach does not warrant
entered a Letter-Agreement with BDO Capital in December 2003 to sell the rescission.
shares at ₱43.50 (SPA), and the Swiss Challenge included BDO Capital's right
to match the highest bid. Petitioners argued this process violated public bidding Reciprocal Obligations — Where the obligation or promise of each
rules and prevented the SSS from obtaining the best possible price. However, party is the consideration for that of the other. When one party performs or is
significant events occurred during the case's consideration. A mandatory tender ready to perform, the other party who has not performed incurs delay. The
offer for EPCIB shares was launched at ₱92 per share. Following this, EPCIB
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power to rescind is implied in reciprocal obligations, in case one obligor does The Supreme Court affirmed the rescission, ordering Adamos and Feria
not comply. to return the purchase price plus interest. The Court held that the injured party
can seek rescission of a reciprocal obligation if fulfillment becomes impossible,
Villamar vs. Mangaoil The parties entered into an Agreement for even after initially choosing fulfillment. The cause of action for rescission arose
purchase and sale of land, followed by a Deed of Absolute Sale, between when the original sale to Adamos and Feria was nullified, making delivery
Estelita Villamar as seller and Balbino Mangaoil as buyer for a parcel of land in impossible.
March 1998. Villamar received a down payment partly to facilitate the release
and transfer of the certificate of title, which Mangaoil intended to use as loan Maglasang vs. Northwestern University Galileo A. Maglasang (GL
collateral, and partly to pay off mortgagees on the property. Mangaoil later Enterprises) was contracted by Northwestern University to supply and install a
sought rescission of the sale, claiming Villamar failed to deliver the certificate modern Integrated Bridge System (IBS) for its maritime program. The
of title and physical possession due to remaining encumbrances. Villamar reciprocal obligation involved GL Enterprises providing and installing the IBS
argued she had complied and that execution of the deed of sale constituted compliant with CHED and IMO standards, and Northwestern University paying
constructive delivery. the agreed price. The central dispute arose when Northwestern University
stopped the installation, claiming the delivered equipment was substandard, old,
The Supreme Court affirmed the decision to rescind the contract and lacked manuals, and indicated being reconditioned, thus not meeting contract
ordered the seller to return the buyer's down payment with interest. The Court specifications or regulatory standards. GL Enterprises sued, arguing
found that Villamar failed to prove delivery of the title and that physical Northwestern University breached by halting work and preventing completion.
possession was not transferred due to the presence of mortgagees. The Court
reiterated the doctrine that rescission of reciprocal obligations is implied when The Supreme Court ruled that GL Enterprises committed a substantial
one party fails to comply with their undertaking. While a public instrument breach by supplying substandard equipment unlikely to pass CHED and IMO
generally effects constructive delivery, this is not the case when the seller lacks standards required by the contract. Northwestern University's action in stopping
control over the property or the buyer cannot take material possession. the installation was deemed justified as it was meant to prevent the acceptance
Villamar's failure to deliver possession and the certificate of title as agreed upon of a non-compliant system. The Court applied the doctrine that rescission of
was deemed a substantial breach. reciprocal obligations under Article 1191 is permissible for a substantial breach
that defeats the contract's objective, not for slight or casual breaches. The Court
Ayson-Simon vs. Adamos In this case, Generosa Ayson-Simon affirmed the rescission of the contracts and ordered the parties to return what
purchased two lots from Nicolas Adamos and Vicenta Feria in May 1946. The they received, allowing the buyer to halt the installation to prevent potential
sellers, Adamos and Feria, failed to deliver the titles and possession of the lots accreditation issues..
as agreed. Later, the original sale of the lots to Adamos and Feria was annulled
by a court decision that became final in May 1967, making their delivery to Mila A. Reyes vs. Victoria T. Tuparan Mila A. Reyes agreed to sell
Ayson-Simon impossible. Ayson-Simon then filed suit seeking rescission of the properties to Victoria T. Tuparan under a “Deed of Conditional Sale with
sale, even though she had previously sought fulfillment. Adamos and Feria Assumption of Mortgage,” where Tuparan was to assume a mortgage and pay
argued that seeking rescission after fulfillment was impermissible and that the the remaining purchase price in installments. The specific reciprocal obligation
action had prescribed. was that Reyes would execute a deed of absolute sale and transfer title only
upon Tuparan's full payment of the purchase price and assumed mortgage. The
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central dispute involved Reyes seeking rescission because Tuparan failed to not a notarial act and he did not refund the cash surrender value. Therefore,
fully pay the last installment of the purchase price by the due date. there was no valid cancellation of the Contract to Sell, and Rufina Dela Cruz
Vda. de Manzano's possession remained lawful. The Court, exercising equity,
The Supreme Court classified the agreement as a contract to sell, not a allowed the buyer to pay the remaining balance to complete the sale.
contract of sale. The Court explained the doctrine that in a contract to sell, the
buyer's full payment is a positive suspensive condition for the seller's obligation ★​ Maceda Law, requiring both notarized notice and refund of cash
to convey title to arise. Failure to fulfill this condition is not considered a surrender value, is essential for valid cancellation of a real estate
breach of contract under Article 1191 for purposes of rescission; rather, it is an installment sale.
event that prevents the seller's obligation from becoming effective. Rescission
under Article 1191 is not applicable because it applies to non-compliance with Fabrigas vs. San Francisco del Monte, Inc. Spouses Isaias and
an existing obligation in reciprocal contracts. Even if Article 1191 were Marcelina Fabrigas entered into a Contract to Sell a parcel of land with San
applicable, Tuparan's failure to pay the remaining balance (₱805,000 out of Francisco Del Monte, Inc. in April 1983, agreeing to pay the price in
₱4.2 million total price) was only a slight or casual breach, not substantial installments. The reciprocal obligation involved the seller's promise to sell and
enough to warrant rescission, especially since a large portion had been paid and the buyer's promise to pay the price, with the seller's obligation to convey title
Tuparan showed willingness to settle the balance. The Court denied rescission conditioned on full payment. The central dispute arose when the Spouses
and allowed Tuparan to pay the outstanding amount. Fabrigas defaulted on payments, and Del Monte considered the first contract
automatically cancelled. A second Contract to Sell was later executed with
Pagtalunan vs. De la Cruz Vda. de Manzano Patricio Pagtalunan restructured terms. When defaults continued under the second contract, Del
(predecessor of petitioner Manuel C. Pagtalunan) entered into a Contract to Sell Monte sued for recovery of possession.
a house and lot with Rufina Dela Cruz Vda. de Manzano in July 1974, with the
price payable in installments. The reciprocal obligation was the seller's promise The Supreme Court found the automatic cancellation clause void under
to sell and the buyer's promise to pay the installments, with delivery of title the Maceda Law. The Supreme Court ruled that Del Monte did not validly
conditioned on full payment. The central dispute was Manuel Pagtalunan's cancel the first contract under R.A. 6552, as it failed to provide a notarial notice
claim that Rufina Dela Cruz Vda. de Manzano's default in paying installments of cancellation and did not refund the cash surrender value. However, the Court
resulted in the automatic rescission of the contract, making her possession found the first contract was novated and extinguished by the execution of the
unlawful and subject to ejectment. second contract due to incompatible terms, particularly the change in price. The
second contract, although initially unenforceable due to lack of the husband's
The Supreme Court ruled that the Contract to Sell was not validly consent, was deemed ratified by his subsequent installment payments. The
cancelled because the seller did not comply with the mandatory requirements of Court upheld the lower court's decision, finding the second contract valid and
the Maceda Law. For an installment sale of real estate, cancellation by the seller enforceable, and that the Spouses Fabrigas had breached it by failing to
must strictly adhere to Maceda Law, regardless of automatic rescission clauses. complete payments. The doctrine discussed highlights that cancellation of
The doctrine states that this requires both a notarial notice of cancellation or installment sales must strictly follow R.A. 6552's procedures, and
demand for rescission received by the buyer and, if the buyer paid at least two non-compliance renders such cancellation ineffective, but obligations can still
years of installments, the refund of the cash surrender value. Manuel be extinguished by novation.
Pagtalunan failed to comply with these requirements, as his demand letter was
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 Communities Cagayan, Inc. vs. Nanol Petitioner Communities P17,000, Island Savings Bank initiated foreclosure on the mortgage. Sulpicio
Cagayan, Inc. and respondents Spouses Arsenio and Angeles Nanol entered M. Tolentino then filed suit seeking the release of the P63,000 balance or
into a Contract to Sell involving a house and lots, where Spouses Nanol agreed rescission of the mortgage.
to pay the price through installment financing. The specific reciprocal
obligation involved Communities Cagayan, Inc.'s promise to sell and Spouses The Supreme Court found that both parties were in default of their
Nanol's promise to pay the installments. The central dispute began when respective reciprocal obligations. Finding that both parties were in
Spouses Nanol defaulted on their payments after Arsenio's death, prompting default—Island Savings Bank first for not releasing the entire loan and Sulpicio
Communities Cagayan, Inc. to seek cancellation and recovery of possession. M. Tolentino later for not paying the P17,000—the Court applied the principle
that the liability of the first infractor should be equitably tempered. The
The Supreme Court ruled that the contract was not validly cancelled. Supreme Court ruled that specific performance for the P63,000 was not
Since Communities Cagayan, Inc. sent the notice but failed to refund the cash possible as the bank was prohibited from further business. Sulpicio M.
surrender value, the cancellation was deemed ineffective, but Spouses Nanol Tolentino was ordered to pay the P17,000 plus interest. The bank's liability for
were still entitled to the cash surrender value equivalent to 50% of total damages for failing to release the P63,000 was offset by Tolentino's liability for
payments. The Court also addressed the improvements made by Spouses Nanol, damages (penalties) on the P17,000. Crucially, the Court held the real estate
applying Article 448 of the Civil Code regarding builders in good faith mortgage was unenforceable regarding the unreleased P63,000 due to partial
exceptionally due to the circumstances and presumed good faith. Under Article failure of consideration. Therefore, the mortgage could only be foreclosed to
448, Communities Cagayan, Inc., as the landowner, has the option to cover the P17,000 debt, limited to a portion (21.25 hectares) of the mortgaged
appropriate the new house by paying indemnity or oblige Spouses Nanol to buy property.
the land. The case was remanded for the trial court to determine necessary
values and for Communities Cagayan, Inc. to exercise its option. Article 1207; Joint & solidary obligations

Article 1192; Both parties guilty of violating the obligation Article 1207. The concurrence of two or more creditors or of two or more
debtors in one and the same obligation does not imply that each one of the
Article 1192. In case both parties have committed a breach of the obligation, former has a right to demand, or that each one of the latter is bound to render,
the liability of the first infractor shall be equitably tempered by the courts. If it entire compliance with the prestation. There is a solidary liability only when the
cannot be determined which of the parties first violated the contract, the same obligation expressly so states, or when the law or the nature of the obligation
shall be deemed extinguished, and each shall bear his own damages. (n) requires solidarity. (1137a)

Central Bank vs. Court of Appeals Island Savings Bank and Sulpicio Solidary Obligation (Joint and Several) — An obligation where each
M. Tolentino, into a reciprocal loan agreement for P80,000.00, secured by a real debtor is liable for the entire obligation, and the creditor may demand the whole
estate mortgage. Island Savings Bank approved the loan and the mortgage was obligation from any of them. Solidary liability is not presumed; it exists only
executed, but the bank violated its obligation by failing to release the P63,000 when the obligation expressly states it, the law provides for it, or the nature of
balance, providing only P17,000. Sulpicio M. Tolentino accepted the P17,000 the obligation requires it.
and signed a promissory note for this amount, but violated his obligation by
failing to pay it back when due. Due to Tolentino's non-payment of the
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 Joint Obligation — An obligation where each obligor answers only for provided by law, or required by the nature of the obligation, otherwise, the
a part of the whole liability. The credit or debt is presumed to be divided obligation is presumed joint. Interpreting the phrase “individually and jointly.”
equally among the debtors if not otherwise stated. the Court ruled that an agreement to be “individually liable” creates a several
obligation, which is enforceable against one of the numerous obligors for the
IMIDC vs. National Labor Relations Commission the underlying whole amount. The Court concluded that the obligation was therefore
obligation stemmed from an employment relationship, culminating in a Labor enforceable against one of the numerous obligors. Thus, the Supreme Court
Arbiter's Decision ordering several respondents, including INIMACO, to pay effectively upheld the execution for the full amount against Ronquillo, finding
monetary awards. The problem regarding the nature of the obligation arose the obligation permitted collection from any single debtor.
during execution when an alias writ was issued which, according to INIMACO,
effectively made the liability solidary by using “and/or” between the Manlar Ricemill vs. Deyto the central dispute was whether Deyto was
respondents' names. An Alias Writ of Execution and subsequent rulings by the liable, particularly solidarily, for a debt incurred by her daughter Ang under a
NLRC treated the liability as solidary, allowing collection of the full amount rice supply contract with Manlar. Manlar sought to hold Deyto and Ang
from any of the respondents. INIMACO argued its liability should be joint, solidarily liable for the unpaid amount after Ang's checks were dishonored. The
meaning it was only responsible for a portion of the total award. trial court initially found them liable “jointly and severally.”

The Supreme Court ruled that INIMACO's liability was not solidary The Supreme Court denied Manlar's petition and affirmed the dismissal
but merely joint, overturning the NLRC's resolution. The Court reiterated the of the complaint against Deyto. The Supreme Court discussed the doctrine that
doctrine that a solidary obligation is one where each debtor is liable for the solidary obligation cannot lightly be inferred and exists only when the
entire amount, while in a joint obligation, each debtor is liable only for their obligation expressly so states, the law provides it, or its nature requires it. The
share. A solidary obligation must be expressly stated, provided by law, or Court found that Ang's checks were drawn solely from her personal account
required by the nature of the obligation, and it cannot be lightly inferred. Since and concluded there was no legal basis to hold Deyto solidarily liable with Ang,
the original judgment did not use the word “solidary” and did not infer it, and as she was not a party to the contract.
because the judgment had become final, it could not be altered to impose
solidary liability. Article 1217; Recovery in case of payment

Ernesto Ronquillo vs. Court of Appeals the central dispute concerned Article 1217. When one of the solidary debtors cannot, because of his
the nature of liability under a court decision based on a compromise agreement insolvency, reimburse his share to the debtor paying the obligation, such share
to pay a debt for dishonored checks. The agreement specifically stated the shall be borne by all his co-debtors, in proportion to the debt of each. (1145a)
defendants, including Ronquillo, “individually and jointly agree to pay” the
balance. Ronquillo argued his liability was merely joint, limited to his pro-rata Republic Glass Corp. vs. Qua the contracts involved were suretyship
share. agreements where RGC, Gervel, and Qua acted as sureties for Ladtek's loans,
supplemented by internal Agreements for Contribution and Indemnity among
The Supreme Court dismissed Ronquillo's petition, effectively themselves outlining their respective shares of liability. The problem regarding
upholding the enforcement against him. The Supreme Court discussed the the stipulation on recovery arose when RGC and Gervel, after making partial
doctrine that a solidary obligation is not presumed and must be expressly stated, payments to creditors and obtaining releases for themselves, demanded
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reimbursement from Qua for his proportionate share of the amount they paid, doctrine that valid payment extinguishing an obligation must be made only to
which Qua refused, leading to foreclosure of his pledged shares. The central the creditor or a person authorized by them or by law. Payment made to the
dispute was whether partial payment by co-sureties triggered the right to wrong party, even if in good faith, does not discharge the debtor's obligation to
reimbursement under their indemnity agreements, even if the entire obligation the true creditor who is without fault. Since Eastern was proven to be the true
was not extinguished. owner of the deposit and the heirs' right to it was not definitively established,
BPI's payment to them did not extinguish its obligation to Eastern. Thus, BPI
The Supreme Court ruled against RGC and Gervel, finding they had no remained liable to Eastern for the deposit amount.
legal basis to seek reimbursement from Qua and therefore the foreclosure of his
pledged shares was invalid. The Court applied the doctrine that while indemnity Culaba vs. Court of Appeals the central dispute revolved around
agreements can be effective upon liability, a solidary debtor making partial whether the Culaba spouses had validly paid their debt to San Miguel
payment can only seek reimbursement from co-debtors if their payment Corporation for a credit sale of beer products. The Culabas claimed they settled
exceeds their own proportionate share of the entire obligation. As RGC and their account by paying a person who appeared to be an SMC supervisor, wore
Gervel's partial payments were less than their combined shares in the total a uniform, drove an SMC van, and issued what looked like genuine SMC
outstanding debt, they could not validly demand reimbursement from Qua. receipts. San Miguel Corporation, however, argued these payments were not
validly made to an authorized representative, noting the receipts were from a
★​ Pledge — a real contract that requires delivery in order to be perfected. lost booklet.
★​ Real Contracts — contracts that require the fourth requisite of
delivery in addition to consent, subject matter, and cause, in order to be The Supreme Court discussed the doctrine that for payment to
perfected. Examples given include deposit, pledge, and commodatum. extinguish an obligation, it must be made to the creditor or to any person
authorized to receive it. It highlighted that a debtor must exercise due diligence
Article 1240; To whom payment shall be made to ascertain the identity and authority of a person claiming to be an agent, and
the burden of proving proper authorization rests on the debtor. Since the Culaba
Article 1240. Payment shall be made to the person in whose favor the spouses failed to prove the person they paid was actually authorized by SMC,
obligation has been constituted, or his successor in interest, or any person the Supreme Court ultimately ruled that their alleged payments were not valid
authorized to receive it. (1162a) and did not extinguish their obligation. The Court found the Culabas were
negligent in not verifying the agent's identity and authority.
BPI vs. Court of Appeals a central dispute arose regarding Eastern
Plywood and Lim's claim for a bank deposit balance after it was withdrawn by Dela Cruz vs. Concepcion the central dispute stemmed from a Contract
heirs of their co-depositor, Velasco. Eastern and Lim had obtained a loan from to Sell a house and lot, where the Dela Cruz spouses claimed Ana Marie
BPI's predecessor, secured by a Holdout Agreement on this joint bank account Concepcion still owed them a balance, primarily for interests and penalties,
with Velasco. The P331,261.44 deposit balance was subsequently released by after the purchase price was fully paid. Concepcion contended the remaining
BPI to Velasco's heirs based on an intestate court authorization balance had been paid. The key issue before the Supreme Court was the validity
of a final P200,000 payment made by Concepcion to a certain Adoracion
The Supreme Court ruled that BPI's payment of the full balance to Losloso, whom Concepcion claimed was authorized to receive payment on
Velasco's heirs was not valid as against Eastern. The Court discussed the behalf of the Dela Cruz spouses.
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 agree that the thing delivered is equivalent to the whole obligation. The Court
The Supreme Court ruled that Concepcion's obligation was ruled that the Deed of Assignment was NOT dation in payment and did NOT
extinguished by payment. The Court applied the doctrine under Article 1240 of totally extinguish the obligation. Since the terms of the dee of assignment
the Civil Code, which states that payment must be made to the creditor, their clearly included “applicable interest charges” and future deliveries, showing no
successor, or any person authorized to receive it. It found that Losloso was an intent for total extinguishment of all liabilities by merely assigning the
authorized agent of the Dela Cruz spouses, citing a letter and testimonial receivable. The parties’ subsequent acts showed acknowledgment of interest,
admission from one of the petitioners granting this authority. Therefore, the assignment did not extinguish the interest obligation.
payment made to Losloso was deemed valid payment to the petitioners,
discharging Concepcion's debt. PNB vs. Pineda the central dispute involved whether TCC's liability
under a Letter of Credit and Trust Receipt Agreement for imported machinery
Article 1245; Dation in payment was extinguished by PNB's repossession of that machinery. TCC had a debt to
PNB under these agreements, secured partly by the machinery itself. The
Article 1245. Dation in payment, whereby property is alienated to the creditor Arroyo spouses were sureties, whose mortgages PNB sought to foreclose. TCC
in satisfaction of a debt in money, shall be governed by the law of sales. (n) argued that PNB taking possession of the machinery after default amounted to
dacion en pago, thus paying the debt and precluding foreclosure against the
Dation in Payment (Dacion en Pago) — Takes place when property is sureties.
alienated to the creditor in satisfaction of a debt in money; it is governed by the
law on sales. It involves the delivery and transmission of ownership of a thing The Supreme Court ruled in favor of PNB, holding that TCC's liability
as an accepted equivalent of the performance of the obligation. It does not was not extinguished by the repossession. The Court clarified that repossession
necessarily mean total extinguishment unless the parties agree. under a trust receipt is merely a security measure, not a transfer of ownership in
satisfaction of the debt. The Court ruled that PNB's repossession of the
Caltex (Phil.), Inc. vs. IAC the central dispute was whether a Deed of machinery did NOT amount to dacion en pago. It clarified that under the trust
Assignment executed by Asia Pacific Airways assigning receivables to Caltex receipt agreement, PNB's possession was merely a form of security for the loan,
for a debt arising from a fuel supply agreement constituted dation in payment not a transfer of ownership to satisfy the debt. Payment extinguishing the debt
(dacion en pago). Asia Pacific Airways owed Caltex a specific amount plus would only occur after PNB foreclosed on the security, sold it, and applied the
interest and service charges. The Deed of Assignment assigned receivables proceeds. Since the debt was not extinguished by repossession, the Supreme
from the National Treasury to Caltex “in payment of ASSIGNOR's outstanding Court ruled that PNB had the right to proceed with the foreclosure against the
obligation plus any applicable interest charges on overdue account and other sureties.
avturbo fuel lifting and deliveries.” Asia Pacific Airways argued that assigning
the receivable, which turned out to be more than the principal debt, meant the ★​ Dation in payment, which is governed by sales, is the delivery and
debt was totally extinguished as dacion en pago. transmission of ownership of a thing to the creditor as an accepted
equivalent of the performance of the monetary debt.
The Supreme Court discussed the doctrine that dation in payment is the ★​ Simple possession of property held as security does not amount to
alienation of property to the creditor as an accepted equivalent of performance, dation in pago.
governed by sales, but it only extinguishes the obligation totally if the parties
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 ★​ Trust Receipts (TRs) — An agreement where an entrustee receives facilitated by A.U. Valencia and Co., Inc.. Papa argued the sale was not
goods in trust from an entruster, with the liberty to sell the goods for complete because he never encashed the check for P40,000 given as part of the
the entrustee's account and deliver the proceeds to the entruster. Failure purchase price, in addition to the P5,000 cash received.
to account for the goods or proceeds constitutes a violation. Creates an
entruster-entrustee relationship. The Supreme Court ruled that the payment was valid and the sale was
consummated. Article 1249 of the Civil Code states that payment by check only
Article 1249; Republic Act No. 8183 (June 11, 1996); Form of payment produces the effect of payment when cashed, unless through the creditor's fault
the instrument is impaired. Since Papa failed to encash the check for over ten
Article 1249. The payment of debts in money shall be made in the currency years, the Court held this constituted unreasonable delay and impairment
stipulated, and if it is not possible to deliver such currency, then in the currency through his fault, deeming the check to have operated as actual payment.
which is legal tender in the Philippines. Therefore, the buyers, having fulfilled their obligation of payment, were
entitled to demand delivery of the title.
Legal Tender — The currency that can be offered in payment of debts.
Checks (whether manager's, cashier's, or personal) are not legal tender, and a Article 1250; Extraordinary inflation and deflation
creditor may validly refuse payment by check. Article 1250. In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of the
Tibajia vs. Court of Appeals the core dispute was whether the obligation shall be the basis of payment, unless there is an agreement to the contrary.
judgment debt owed by the Tibajia spouses to Eden Tan, arising from a
collection suit, was extinguished by their tender of payment consisting of cash Filipino Pipe and Foundry Corp. vs. NAWASA the central dispute
and a cashier's check. Eden Tan refused to accept the cashier's check, insisting arose from NAWASA's failure to pay the full balance for cast iron pipes
on receiving legal tender or proceeding with the levy on previously garnished supplied by FPFC under a 1961 contract. After a collection suit resulted in a
funds.. judgment for FPFC payable in bonds which NAWASA failed to deliver, FPFC
filed a second suit seeking an adjustment of the unpaid balance in 1971. FPFC
The Supreme Court ruled that the payment tendered was not valid argued that extraordinary inflation since the 1967 judgment justified the
because a check, including a cashier's check, is not legal tender and its application of Article 1250 of the Civil Code.
acceptance is purely optional for the creditor. The doctrine discussed hinges on
Article 1249 of the Civil Code, stating checks produce payment effect only The Supreme Court affirmed the dismissal of the complaint, ruling that
when cashed or impaired by creditor fault, and specifically on Section 63 of extraordinary inflation as contemplated by Article 1250 was not proven. While
Republic Act No. 265 (Central Bank Act), which explicitly states that checks acknowledging a decline in the peso's value, the Court held it was merely a
do not have legal tender power. The Court affirmed that a creditor may validly universal trend and did not constitute extraordinary inflation, required by law to
refuse payment by check. adjust the value of an obligation. Extraordinary inflation is a rare phenomenon,
exemplified by the hyperinflation in Germany in the 1920s, and cannot be
Papa vs. Valencia & Co., Inc. the central dispute concerned the assumed.
consummation of a contract of sale for a parcel of land entered into by Myron
C. Papa, as administrator of Angela M. Butte's estate, with Felix Peñarroyo,
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 ★​ Extraordinary inflation is an unusual change in currency purchasing Roman Catholic Archbishop of Malolos vs. IAC the central dispute
power, beyond common fluctuations and unforeseen by the parties. revolved around whether Robes-Francisco Realty (the buyer) validly paid the
remaining balance of a land sale contract with the Roman Catholic Bishop of
Telengtan Brothers and Sons, Inc. vs. United States Lines the Malolos (the seller). The contract of sale required the buyer to pay the
contracts were implicit contracts of carriage evidenced by Bills of Lading. The P124,000.00 balance within a specified period, including a grace period.
central dispute involved U.S. Lines' claim against Telengtan for demurrage Robes-Francisco claimed they tendered a certified personal check for the
charges because Telengtan failed to withdraw its cargo from container vans amount on the last day, but the Bishop refused to accept it.
within the allowed 10-day free period. Telengtan denied liability and filed a
counterclaim related to U.S. Lines stripping the containers and warehousing the The Supreme Court ruled that no valid tender or consignation was
goods. The lower courts found Telengtan liable and ordered recomputation of made. The Court doctrine states that tender of payment must be a positive,
the award under Article 1250 due to peso devaluation. unconditional act involving legal tender currency. Proof of having sufficient
funds available is not proof of actually tendering payment. An offer of a check,
The Supreme Court affirmed Telengtan's liability for demurrage, even a certified personal check, is not legal tender and does not constitute a
finding Telengtan was at fault for the delay and the warehousing was authorized valid tender of payment that a creditor is obliged to accept. Because the tender
by customs. However, the Court modified the decision by deleting the order for was invalid, the subsequent consignation also failed to discharge the obligation.
recomputation under Article 1250. Extraordinary inflation must be proven and
cannot be assumed. Mere decline in purchasing power is not extraordinary Rayos vs. Reyes The core dispute concerned the ownership of three
inflation, and the value at the time of obligation controls payment unless there parcels of unregistered land. This arose from a 1957 Deed of Sale with right to
is an agreement to the contrary, neither of which was proven. repurchase agreement between the Tazal spouses and Mamerto Reyes, where
the Tazals failed to repurchase within the two-year period. The Rayos spouses,
Article 1256; Tender of payment and consignation as subsequent purchasers from the Tazals, claimed they had effectively
repurchased the property. Their main argument hinged on a ₱724.00 deposit
Article 1256. If the creditor to whom tender of payment has been made refuses Francisco Tazal made in a prior lawsuit (Civil Case No. A-245) seeking to have
without just cause to accept it, the debtor shall be released from responsibility the original sale declared an equitable mortgage.
by the consignation of the thing or sum due.
The Supreme Court denied the Rayos; petition, affirming that the Reyes
Consignation alone shall produce the same effect in the following cases: heirs owned the land, and ruled the consignation of ₱724.00 was ineffective.
The Court reiterated the requisites for a valid consignation, including proper
(1)​ When the creditor is absent or unknown, or does not appear at the tender and notice. The deposit was deemed invalid because the tender was
place of payment; conditional on the prior contract being an equitable mortgage, a claim rejected
(2)​ When he is incapacitated to receive the payment at the time it is due; by the court. Furthermore, notice of the intention to consign was not proven,
(3)​ When, without just cause, he refuses to give a receipt; and the amount was insufficient as it did not include expenses required by the
(4)​ When two or more persons claim the same right to collect; court's judgment. The Court emphasized that failure to comply with any
(5)​ When the title of the obligation has been lost. (1176a) requisite renders consignation ineffective.

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 ★​ Test for a valid consignation: Furthermore, the Court clarified that the withdrawal of the consigned amounts
1.​ A debt is due. There must be a valid and existing obligation to by Dayrit and FGR did not validate the consignation or extinguish the
pay. obligation because they had expressly reserved their right to question its
2.​ Valid prior tender of payment and unjust refusal by the validity. Failure to satisfy even one of the consignation requisites renders it
creditor. The debtor must have made a valid and unconditional ineffective.
offer to pay the creditor the full amount due in legal tender or
the stipulated currency. The creditor's refusal to accept the Spouses Cacayorin vs. AFP-MBAI the contracts involved a Loan and
payment must be without just cause. Mortgage Agreement with a bank for the purchase of property from AFPMBAI,
3.​ Previous notice of the consignation to the persons interested and a Deed of Absolute Sale from AFPMBAI to the petitioners. The core
in the performance of the obligation. The debtor must inform dispute centered on the Spouses Cacayorin's inability to determine who should
the creditor and other interested parties (like co-debtors, receive full payment for a property loan. They had purchased the land from
guarantors) of their intention to deposit the payment with the AFPMBAI but obtained a loan from the Rural Bank of San Teodoro (RBST),
court. which later closed; AFPMBAI subsequently came into possession of the loan
4.​ Actual deposit of the amount due with the proper judicial documents and title and demanded payment. To resolve this, the Cacayorins
authority. The debtor must place the full amount due at the filed a complaint for consignation, seeking to deposit the loan amount with the
disposal of the court. court.
5.​ Subsequent notice of the consignation to the interested
parties. After the deposit is made, the debtor must again notify The Supreme Court granted the Cacayorins' petition, ruling that their
the creditor and other interested parties that the consignation complaint properly stated a case for consignation. The Court discussed the
has been completed. doctrine that consignation is necessarily judicial, meaning it must be made by
depositing the payment at the disposal of judicial authority, placing jurisdiction
Dalton vs. FGR Realty and Development Corporation the contract with the regular courts, not administrative bodies like the HLURB. A prior
involved was a lease agreement for a parcel of land. The central dispute tender of payment is not always required for consignation, especially when the
involved lessee Soledad Dalton's claim over leased land after the owner, Flora creditor is unknown or multiple parties claim the right to collect, which was the
R. Dayrit, sold it to FGR Realty and Development Corporation. The dispute situation faced by the Cacayorins. Thus, the Cacayorins' inability to determine
escalated when Dayrit and FGR stopped accepting Dalton's rental payments, the correct creditor justified proceeding with the consignation case in court.
prompting Dalton to attempt payment through consignation.
Article 1279; Legal Compensation
The Supreme Court ultimately denied Dalton’s petition, ruling that the
consignation was void. The Court discussed the doctrine of consignation, Article 1279. In order that compensation may be proper, it is necessary:
emphasizing that compliance with its essential requisites is mandatory and must (1)​ That each one of the obligors be bound principally, and that he be at
be strict and full, not merely substantial. It highlighted the crucial requirements the same time a principal creditor of the other;
of giving prior notice of the intention to consign before depositing the payment (2)​ That both debts consist in a sum of money, or if the things due are
and subsequent notice after the consignation has been made to all interested consumable, they be of the same kind, and also of the same quality if
parties. The Court found that Dalton failed to provide these required notices. the latter has been stated;
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 (3)​ That the two debts be due; of the alleged deficiency prevented it from being legally compensated with
(4)​ That they be liquidated and demandable; Fajardo's admitted money market claim.
(5)​ That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the Francia vs. IAC The problem arose when Francia failed to pay his real
debtor. (1196) estate taxes from 1963 to 1977, leading to the property being sold at public
auction in December 1977 to satisfy the tax delinquency. Francia contended
Compensation (Legal) — A mode of extinguishing obligations to the that his P2,400.00 tax delinquency to the city government had been legally
concurrent amount when two persons are reciprocally debtors and creditors of extinguished by legal compensation, arguing that the national government owed
each other in their own right and as principals. It takes place by operation of him P4,116.00 from the expropriation of a portion of his land.
law when all the necessary requisites are present.
The Supreme Court ruled against Francia, holding that his tax
Quantum Meruit — A basis for compensating legal services obligation was not set off by the amount owed for the expropriated property.
previously rendered, based on the reasonable value of such services. The doctrine of legal compensation requires that parties be reciprocally
creditors and debtors in their own right, and that the two debts be due.
International Corp. Bank vs. IAC the central dispute involved whether Crucially, the Court reiterated its established doctrine that taxes cannot be the
the International Corporate Bank could legally set off the proceeds from subject of set-off or compensation against claims a taxpayer may have against
Natividad M. Fajardo's money market placement against a claimed deficiency the government. This is based on public policy, as taxes arise from a duty to the
balance following the foreclosure of her mortgaged properties. Fajardo had a government, not a contract. Furthermore, the tax was owed to the city, while the
loan secured by mortgages with the bank. After the properties were foreclosed expropriation was by the national government, making them distinct entities for
and sold, the bank alleged she still owed a P6.81 million deficiency. compensation purposes. Francia had received the expropriation payment notice
Concurrently, Fajardo had made a P1,046,253.77 money market placement with but did not use the funds to pay his taxes.
the bank that matured. The bank refused to release these funds, claiming the
right to apply or set off this amount against the alleged loan deficiency. Fajardo, Mondragon Personal Sales, Inc. vs. Victoriano S. Sola, Jr. the central
however, disputed the validity of the foreclosure and the existence of the dispute arose from Mondragon withholding Sola's service fees earned under
deficiency, seeking the release of her money market investment. their Contract of Services, applying them to offset a debt owed by Sola's wife
from a separate Franchise Distributorship Agreement. Sola, acting as a service
The Supreme Court affirmed the lower court's ruling, finding that the contractor providing office and bodega facilities, claimed Mondragon
bank could not validly claim legal compensation. The doctrine applied is that unlawfully withheld his fees. Mondragon contended that Sola had assumed his
for legal compensation to take place, the two debts must be due, liquidated, and wife's obligation and legal compensation had occurred
demandable. The bank admitted its debt to Fajardo for the money market
proceeds, making that debt liquidated. However, the bank's claim against The Supreme Court ruled in favor of Mondragon, finding that legal
Fajardo for the P6.81 million deficiency was vigorously disputed and was still compensation validly occurred. Legal compensation occurs by operation of law
undergoing litigation. The Court emphasized that compensation is not proper when specific requisites are met. The Court found all conditions present:
for unliquidated, disputed claims. Thus, the unliquidated and contested nature Mondragon and Sola were principal obligors and creditors to each other; their
debts were sums of money; the debts were due, liquidated, and demandable.
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Crucially, Sola's letter acknowledged and bound him to pay his wife's debt to ★​ For legal compensation to take place, the parties must be reciprocal
Mondragon, making him a co-debtor. Sola had become a co-debtor of his wife's principal creditors and debtors, both debts must be sums of money, due,
obligation, fulfilling the reciprocity requirement for compensation. Therefore, and liquidated and demandable.
Mondragon's withholding of Sola's service fees and applying them was deemed
an acknowledgment of the legal compensation that had already taken place by Article 1291; Novation
operation of law.
Article 1291. Obligations may be modified by:
★​ Legal compensation extinguishes obligations to the concurrent amount (1)​ Changing their object or principal conditions;
when reciprocal debts exist between principal obligors and creditors. (2)​ Substituting the person of the debtor;
★​ Requisites of legal compensation: (3)​ Subrogating a third person in the rights of the creditor. (1203)
(1)​ each party is a principal obligor and creditor of the other
(co-debtors), Novation — Extinguishment of an old obligation by creating a new
(2)​ both debts are in a sum of money or they be of the same kind, one. Requires a previous valid obligation, agreement to a new contract,
are due, extinguishment of the old, and birth of a valid new obligation. Requires
(3)​ liquidated, and demandable. unequivocal declaration or total incompatibility between old and new
(4)​ No controversy involving third parties. obligations.

Montemayor vs. Millora the contract was a loan agreement between Animus Novandi — The intention to extinguish the old obligation for
individuals. Millora borrowed money from his old client, Montemayor. The the new one. It is never presumed and must be clearly and unmistakably shown.
problem arose when the borrower (Vicente D. Millora) failed to pay the loan,
and the lender (Jesus M. Montemayor) filed a collection complaint. Vicente Iloilo Traders vs. Heirs of Soriano the central dispute was whether an
filed a counterclaim for attorney's fees for past legal services rendered to Jesus. Amicable Settlement between the parties had novated or extinguished the
Sorianos' original loan obligations under two promissory notes secured by real
The Supreme Court ruled that legal compensation applied. A debt is property mortgages with Iloilo Traders Finance Inc. (ITF). The original
liquidated not only when in definite figures but also when the exact amount obligation involved default on loans, leading ITF to seek foreclosure. The
depends only on a simple arithmetical operation or is determined by judgment. Amicable Settlement proposed a new consolidated amount (P431,200.00) and a
The Court found that the RTC's dispositive portion, by stating that the attorney's 36-month payment plan, and stipulated foreclosure upon default of the
fees were equivalent to whatever amount recoverable from Vicente, effectively settlement terms. Seven years after the settlement was submitted to court but
liquidated Millora's counterclaim for attorney's fees at the moment the not approved due to non-compliance, the Sorianos sought to enforce it,
judgment became final. Thus, the Court held that legal compensation between claiming it had novated the original obligation.
Jesus's loan debt and Millora's attorney's fees took place by operation of law,
leaving nothing further to execute between the parties. The Supreme Court ruled that the amicable settlement did not effect an
extinctive novation of the original mortgage obligations. The Court discussed
the doctrine that novation extinguishes an old obligation and creates a new one,
but it is never presumed and requires either express intent or total
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incompatibility between the old and new terms. Changes that are merely loans (P250,000.00, P150,000.00, and P600,000.00), previously secured by
modificatory, such as extending payment terms, do not extinguish the original mortgages on the spouses See and Tan's property, were extinguished by
obligation. In this case, the settlement was found to be merely modificatory, novation when they were consolidated into a single P1.0 Million loan under
extending payment terms but crucially preserving essential clauses like the right Promissory Note No. BDS-3605, thus releasing the property from the
to foreclose upon default. Furthermore, the Court held that the Amicable mortgages.
Settlement did not take effect because the Sorianos failed to comply with the
court's conditions for its approval and subsequently failed to comply with the The Supreme Court ruled that no novation occurred, affirming the
settlement terms themselves. Under the Civil Code, failure to abide by a Court of Appeals' decision. The Court explained that novation is never
compromise allows the other party to insist upon the original demand. Thus, the presumed and requires either an express agreement or total incompatibility
original secured obligations remained. between the old and new obligations; merely restructuring and consolidating
the loans under the Promissory Note, which itself indicated it was secured by
★​ Amicable Settlement / Compromise — A contract whereby parties, by real estate mortgages, did not extinguish the original secured obligations.
making reciprocal concessions, avoid or put an end to litigation. It Furthermore, the original mortgage contracts explicitly covered renewals or
determines the rights and obligations of only the parties to it. If one extensions of the loans, confirming the parties' intent that the property secure
party fails to abide by it, the other may enforce it or regard it as the consolidated amount. The conversion of one debtor entity from a
rescinded and insist upon the original demand. partnership to a corporation was also found not to constitute subjective
novation without an express release of the original debtors.
★​ In extinctive novation would thus have the twin effects
(1)​ extinguishing an existing obligation and, second, ★​ Objective novation occurs when there is a change of the object or
(2)​ creating a new one in its stead. principal conditions of an existing obligation
★​ Extinctive novation presupposes a confluence of four essential ★​ Subjective novation occurs when there is a change of either the person
requisites: of the debtor, or of the creditor in an existing obligation.
(1)​ a previous valid obligation, ○​ Delegacion — A mode of substituting the debtor where the
(2)​ an agreement of all parties concerned to a new contract, original debtor offers, and the creditor accepts, a third person
(3)​ the extinguishment of the old obligation; who consents to the substitution and assumes the obligation;
(4)​ the birth of a valid new obligation consent of all three is needed.
★​ Novation is merely modificatory where the change brought about by ★​ Mixed novation occurs when the change of the object or principal
any subsequent agreement is merely incidental to the main obligation conditions of an obligation occurs at the same time with the change of
(e.g., a change in interest rates or an extension of time to pay). either in the person of the debtor or creditor.

Ajax Marketing & Development Corp. vs. Court of Appeals the core California Bus Lines vs. State Investment House the central dispute
dispute involved petitioners Ajax Marketing & Development Corporation, concerned whether agreements between petitioner California Bus Lines, Inc.
Antonio Tan, Elisa Tan, Tan Yee, and spouses Marcial See and Lilian Tan, and (CBLI) and Delta Motors Corporation (Delta) extinguished CBLI's debt to
respondent Metropolitan Bank and Trust Company (Metrobank), regarding the Delta under original promissory notes, including five later assigned to
validity of a real estate foreclosure. Petitioners claimed that their three original respondent State Investment House, Inc. (SIHI). CBLI argued that a
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Restructuring Agreement which altered payment terms and added obligations, or that the old and the new obligations be on every point incompatible with
or a subsequent Compromise Agreement that involved foreclosure and settled each other. (1204)
matters between only Delta and CBLI, had novated the promissory notes.
Philippine National Bank vs. Lilian S. Soriano involved a Floor Stock
The Supreme Court ruled that neither agreement constituted an Line credit facility extended by Philippine National Bank (PNB) to Lisam
extinctive novation of the notes assigned to SIHI. The Restructuring Agreement Enterprises, Inc. (LISAM), with availments secured by Trust Receipts (TRs).
merely changed payment schedules (from monthly to daily remittances with The central dispute was whether the approval of a Restructuring Proposal or
extensions) and added a management takeover clause, which were not conversion to an Omnibus Line for Lisam Enterprises, Inc.'s credit facilities,
essentially incompatible with the promissory notes. The Compromise represented by Lilian S. Soriano, had novated or extinguished the original
Agreement, being solely between Delta and CBLI, could not bind SIHI or obligations under Trust Receipts issued to PNB. The original obligation
extinguish CBLI's obligation on the notes Delta had already assigned to SIHI. involved availments on a Floor Stock Line secured by 52 Trust Receipts,
Therefore, the Supreme Court held CBLI liable to SIHI for the value of the requiring Lisam to hold motor vehicles in trust for PNB and remit sales
assigned notes. proceeds. The proposed new arrangement involved consolidating and
restructuring the credit facilities into an Omnibus Line. Soriano contended that
★​ Novation is never presumed and requires either the following: PNB's approval of a restructuring proposal for LISAM's credit facilities
1.​ express declaration to extinguish the old obligation novated the obligation under the trust receipts, converting it into a simple loan
2.​ total incompatibility between the old and new obligations. where only civil liability remained.

★​ Test of incompatibility — whether the two obligations can stand The Supreme Court ultimately ruled no real and objective novation
together, each one having its independent existence. If they cannot, occurred. The proposed restructuring did not constitute an extinctive novation
they are incompatible and the latter obligation novates the first. of the civil obligations under the Trust Receipts. The Court found no essential
1.​ First — when novation has been explicitly stated and declared incompatibility between the original Trust Receipt obligations and the
in unequivocal terms. OR purported restructured Omnibus Line. Crucially, the proposed restructuring was
2.​ Second — when the old and the new obligations are subject to conditions precedent that were not fulfilled, preventing its effectivity
incompatible on every point. and thus precluding novation. Therefore, the civil obligations under the Trust
★​ The incompatibility must take place in any of the essential elements of Receipts remained unextinguished.
the obligation, such as its object, cause or principal conditions
thereof; ★​ Mere changes in payment terms or adding compatible obligations are
○​ otherwise, the change would be merely modificatory in nature only modificatory.
and insufficient to extinguish the original obligation. ★​ Mere changes in payment terms or supplemental agreements are
insufficient to extinguish the original obligation or its associated
Article 1292; Real or objective novation criminal liability.
★​ Credit Facility — An agreement or arrangement providing credit.
Article 1292. In order that an obligation may be extinguished by another which Types mentioned include Floor Stock Line (FSL), Omnibus Line (OL),
substitute the same, it is imperative that it be so declared in unequivocal terms, Revolving Credit Line (RCL), Discounting Line Against Post-Dated
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 Checks (DLAPC), and Domestic Bills Purchased Line (DBPL). Can be unequivocally shown. While novation can be objective or subjective, subjective
secured by Trust Receipts. novation by substituting the debtor requires the indispensable consent of the
creditor. This consent must expressly release the original debtor from the
Article 1293; Subjective novation obligation. Merely accepting payment from or adding a third person as a debtor
without the creditor's express consent to release the original debtor only creates
Article 1293. Novation which consists in substituting a new debtor in the place a co-debtorship or suretyship.
of the original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the new Article 1305; Stages of a contract
debtor gives him the rights mentioned in articles 1236 and 1237. (1205a)
Article 1305. A contract is a meeting of minds between two persons whereby
★​ Substitution of Debtor — A form of novation where a new debtor one binds himself, with respect to the other, to give something or to render some
replaces the original one. Requires the creditor's consent and the service. (1254a)
original debtor's express release. Without express release, the new
debtor is merely a co-debtor or surety. A contract is a meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
S.C. Megaworld Construction vs. Parada the contract entered into was It is perfected by mere consent. Generally valid and binding from perfection
a purchase agreement where S.C. Megaworld bought electrical lighting regardless of form. Undergoes negotiation, perfection, and consummation
materials from Engineer Luis U. Parada's sole proprietorship, Genlite stages. Must have consent, object certain, and cause.
Industries. The central dispute was whether petitioner S.C. Megaworld's debt
for electrical lighting materials purchased from respondent Engr. Luis U. ★​ Negotiation - Covers the period from prospective parties indicating
Parada was extinguished by novation. The original obligation was S.C. interest to agreement. Ends at the moment of agreement. An offer can
Megaworld's failure to pay the full amount for materials, leaving a P816,627.00 be withdrawn at this stage.
balance. S.C. Megaworld claimed novation occurred when a third party, Enviro ★​ Perfection - Takes place when parties agree upon essential elements
Kleen Technologies, Inc., made a partial payment and allegedly agreed to (consent, object, cause).
assume the remaining debt. Then, it stopped making further payments, leaving ★​ Consummation - Begins when the parties perform their respective
a significant outstanding balance. S.C. Megaworld argued this resulted in undertakings, culminating in the extinguishment of the contract.
novation by substitution of debtor, claiming they were released from the
obligation when the Engr. Luis U. Parada accepted partial payment from Enviro Robern Development Corporation vs. People’s Landless Association
Kleen. A transaction commenced when PELA (People's Landless Association) offered
to purchase a lot owned by Al-Amanah Islamic Development Bank. PELA
The Supreme Court ruled against the alleged novation, finding that the made a substantial deposit and a bank annotation on their offer letter. PELA
substitution of debtor did not validly extinguish the original obligation. The believed a perfected contract of sale existed from these. However, Al-Amanah
Court found that Engr. Parada did not clearly and unequivocally consent to subsequently rejected PELA's offered purchase price and sold the property to
release S.C. Megaworld, thus maintaining its liability. The Court's doctrine Robern Development Corporation.
emphasizes that novation is never presumed but must be clearly and
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 The Supreme Court ruled that there was no perfected contract of sale interest rate modifications were not perfected due to the absence of mutual
between PELA and Al-Amanah. The Court discussed the three stages contracts agreement, rendering the increases invalid.
undergo: negotiation, perfection, and consummation. For a contract of sale to
be perfected, there must be a meeting of the minds on the object and the price. ★​ principle of mutuality of contracts dictates that contracts must bind
PELA's letter was merely an offer to purchase the land for ₱300,000.00. both parties and cannot be left solely to the will of one.
Al-Amanah's acknowledgment and acceptance of a deposit, noted on receipts as
“deposit on sale,” did not constitute acceptance of the offer. The bank's Head Article 1311; Stipulation in favor of third persons
Office, which had the authority to approve sales, ultimately rejected PELA's
offer. Thus, the transaction with PELA never moved beyond the negotiation Article 1311 If a contract should contain some stipulation in favor of a third
stage due to the lack of consent and agreement on the price. person, he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental benefit or
Article 1308; Mutuality of contracts interest of a person is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person. (1257a)
Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a) ★​ Contracts Pour Autrui — Contracts containing a stipulation in favor
of a third person, who may demand fulfillment if they accept before
Philippine Savings Bank vs. Castillo The contract entered into was a revocation. The benefit must be clearly and deliberately conferred, not
loan agreement secured by a real estate mortgage, evidenced by a Promissory merely incidental.
Note. The problem arose from May 1997 to December 1999 when the bank,
Philippine Savings Bank, unilaterally increased and decreased the interest rates Mamaril vs. The Boy Scout of the Philippines the contracts involved
on the loan, with the highest reaching 29%, despite the Promissory Note were primarily a lease agreement for parking space between Sps. Mamaril and
initially stating 17%. Although the borrowers were notified and requested rate BSP, and a separate Guard Service Contract between BSP and AIB Security
reductions, they did not give their confirmation or formal consent to these Agency. The central dispute involved Spouses Benjamin C. Mamaril and Sonia
specific changes. When the borrowers could not keep up with the payments at P. Mamaril seeking to hold the Boy Scout of the Philippines (BSP) liable for the
the increased rates, the bank initiated foreclosure proceedings. loss of their jeepney stolen parked in the BSP's parking compound. This is due
to the negligence of the security guards employed by AIB. Spouses Mamaril
The Supreme Court held that the unilateral determination and argued that BSP was liable based on the Guard Service Contract between BSP
imposition of increased rates violated the principle of mutuality of contracts. and AIB Security Agency, Inc., which provided security for the premises.
This doctrine mandates that a contract must bind both contracting parties, and
its validity or compliance cannot be left solely to the will of one of them. The The Supreme Court ruled that BSP was not liable and that Sps.
promissory note allowed the bank to change rates solely at its discretion, and Mamaril, as third parties, could not claim rights under the Guard Service
escalation clauses are generally valid. However, the borrowers' lack of response Contract. The court found no employer-employee relationship with the guards
to memos about the rate changes or their requests for rate reduction did not and that the Guard Service Contract did not contain a valid stipulation in favor
signify consent. Therefore, although the loan contract itself was valid, the of Sps. Mamaril. Qhile acknowledging the doctrine of stipulation pour autrui
which benefits third persons, the Court found that none of the requisites for
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such a stipulation were present. The Guard Service Contract, though ★​ contracts generally bind only the parties, but an exception exists for
mentioning protection of property, was intended to benefit BSP by allowing it stipulations in favor of a third person (contracts pour autrui).
to seek indemnity from AIB for losses caused by the guards, not to confer a
direct favor upon third persons like Spouses Mamaril. Spouses Mamaril had no Article 1314; Unlawful Interference
cause of action based on this contract because they were not parties to it, and it
contained no clear stipulation deliberately favoring them which they had Article 1314. Any third person who induces another to violate his contract shall
accepted. be liable for damages to the other contracting party. (n)

★​ principle of relativity of contracts — a contract is binding only Gilchrist vs. Cuddy C. S. Gilchrist had a contract to rent (contract of
between the parties lease) a specific film from E. A. Cuddy. The problem arose prior to the
★​ Stipulation in favor of a third person requires the contracting parties scheduled exhibition week when Cuddy willfully breached his contract by
to have the following: renting the same film to Jose Fernandez Espejo and Mariano Zaldarriaga for a
○​ clearly and deliberately conferred a favor upon the third party, higher price. Both were aware that Cuddy owned the film and that prior
○​ not merely an incidental benefit, and arrangements existed, yet knowingly induced this breach. Gilchrist sued Cuddy
○​ that the third party accepted it. and Espejo/Zaldarriaga, seeking remedies including an injunction to stop the
latter from exhibiting the film.
Coquia vs. Fieldmen’s Insurance Co., Inc. the contract entered into
was a common carrier accident insurance policy between Fieldmen's Insurance The Supreme Court ruled that Espejo and Zaldarriaga were liable to
Company and Manila Yellow Taxicab Co., Inc.. The central dispute was Gilchrist for the damages caused by their interference with his contract with
whether the parents and heirs of a deceased taxicab driver could collect benefits Cuddy. The Court discussed the doctrine that intentionally interfering with
under a common carrier accident insurance policy obtained by his employer, the another's contract to gain a profit constitutes an unlawful act generative of civil
Manila Yellow Taxicab Co., Inc.. Fieldmen's Insurance Co., Inc. (the Company) liability, which is a form of tort. This liability arises from the unlawful act of
argued the parents, Melecio Coquia and Maria Espanueva, had no contractual interference itself, not from a contractual relationship between the interfering
relationship with them. party and the injured party. The interferer's motive being merely a desire for
profit does not relieve them of liability, and knowledge of the specific identity
The Supreme Court ruled that the Coquias, as heirs of the driver Carlito of the other contracting party is not a prerequisite for the cause of action.
Coquia, had a direct cause of action against the Company. The Common Carrier Gilchrist's cause of action against Espejo and Zaldarriaga was based on this
Accident Insurance Policy explicitly stated the Company would indemnify the tortious interference, allowing him to seek an injunction as a proper remedy
Insured for liability for death or injury to any passenger “including the Driver” where damages are difficult to assess.
and would indemnify the driver's personal representatives in case of death. This
was deemed a clear and deliberate conferral of favor upon the driver, a third ★​ a third party who intentionally interferes with a contract, causing one
party, allowing his heirs to demand fulfillment. The driver's payment of half the party to breach it for the third party's gain, commits an actionable
premiums also highlighted this intent, solidifying the third party's cause of wrong.
action. ★​ liability stems from the wrongful act of interference, not directly from
the contract itself
°skm° - 1E
 ○​ interference cannot be justified by mere competition if it of the offer and the acceptance upon the thing and the cause which are
violates existing contractual rights. to constitute the contract. Must be free, voluntary, willful, and with
reasonable understanding.
Yu vs. Unisia Merchandising the contract involved was an exclusive ★​ Object certain which is the subject matter of the contract — The
sales agency agreement between Philip S. Yu and the House of Mayfair, object is the prestation or conduct required to be observed (to give, to
granting Yu exclusive distributorship rights for wallcovering products in the do, or not to do).
Philippines. The problem arose when Unisia Merchandising, a third party ★​ Cause of the obligation which is established — A contract is
stranger to the exclusive contract, imported the same goods through another presumed to be supported by cause or consideration. Lack of
entity and sold them in the Philippines, allegedly misleading the supplier about consideration results in a contract that is null and void ab initio. Even if
the destination of the goods. Yu alleged Unisia's actions unlawfully interfered the consideration is inadequate, the contract is generally not
with his exclusive distributorship contract. invalidated, unless there has been fraud, mistake, or undue influence.

The Supreme Court ruled that the lower courts erred in denying Yu's C.F. Sharp & Co. Inc. vs. Pioneer Insurance & Surety Corporation
request for an injunction merely because Unisia was not a party to the exclusive The central dispute was whether a Contract of Employment was perfected
contract. The liability of the interfering party, like Unisia, stems from an between C.F. Sharp & Co. Inc., an employment agency, and seafarers Wilfredo
“independent act generative of civil liability,” essentially a tort, rather than any C. Agustin and Hernando G. Minimofor positions as Sandblaster/Painters. The
contractual obligation. The Court affirmed that the right to perform an problem arose after the contract was executed when C.F. Sharp failed to deploy
exclusive distributorship agreement is a proprietary right that is legally them as agreed and subsequently refused to release their documents unless they
protected. Unisia's alleged action of obtaining goods from the supplier to defeat signed a quitclaim. The Court of Appeals had ruled that no contract was
Yu's exclusive right was considered akin to inducing a party to violate their perfected because actual deployment did not occur.
contract, providing Yu with a cause of action against Unisia for this tortious
interference. The Supreme Court ruled that the Contract of Employment was a
perfected contract. The Court discussed the doctrine that contracts are perfected
★​ injunction is an appropriate remedy to prevent wrongful interference by mere consent. In this case, the parties agreed upon the terms of the Contract
with contracts by strangers to those contracts. of Employment, including the position, salary, and other conditions, signifying
their consent through signatures. The object was the seafarers' service, and the
Article 1315 ; Consensual contracts ; effects cause was their expected compensation. The signed employment contract was a
perfected consensual contract, creating an obligation for C.F. Sharp to deploy
Article 1315. Contracts are perfected by mere consent, and from that moment the workers, and its failure to do so gave rise to the workers' right to demand
the parties are bound not only to the fulfillment of what has been expressly performance and claim damages. The perfection of the contract is distinct from
stipulated but also to all the consequences which, according to their nature, the commencement of the employer-employee relationship, which depends on
may be in keeping with good faith, usage and law. (1258) actual deployment. Thus, the failure to deploy constituted a breach of the
perfected consensual contract, giving the seafarers a cause of action for
★​ Consent between contracting parties — Consent is defined as the damages.
meeting of minds between two persons. It is manifested by the meeting
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 ★​ Perfection, the second stage of a contract following negotiation, occurs counter-offer meant consent was lacking, and no repurchase contract was
when the parties agree on the essential elements: consent, object, and perfected.
cause.
○​ From that moment, the parties are bound not only to the Laudico vs. Aria the central dispute was whether a contract of lease
express stipulations but also to all consequences in keeping was perfected between Mamerto Laudico and Fred M. Harden (plaintiffs) and
with good faith, usage, and law. Vicente Arias (representing the owners). The problem arose on March 6, 1919,
when the Arias (offerer) sent a letter withdrawing his offer before he received
Article 1319 ; Consent and acceptance ; How manifested the letter of acceptance sent by the Laudico (offeree) on the same day.

Article 1319. Consent is manifested by the meeting of the offer and the The Supreme Court ruled that no contract was perfected. The Court
acceptance upon the thing and the cause which are to constitute the contract. discussed the doctrine regarding how consent is manifested when acceptance is
The offer must be certain and the acceptance absolute. A qualified acceptance made by letter. Article 1262 of the Civil Code states that acceptance by letter
constitutes a counter-offer. does not take effect until it comes to the knowledge of the offerer. Before the
offerer learns of the acceptance, they are not yet bound and can still withdraw
Heirs of Fausto C. Ignacio vs. Home Bankers Savings and Trust the offer. Arias sent his letter withdrawing the offer before he received
Company The central dispute was whether Fausto C. Ignacio (later his Heirs) Laudico's letter of acceptance. Therefore, when Arias received the acceptance,
and Home Bankers Savings and Trust Company had a perfected contract for the the offer was no longer in existence because it had already been validly
repurchase of foreclosed properties. under a loan mortgage. The problem arose withdrawn. There was no concurrence of offer and acceptance to create a
after the foreclosure and consolidation of title when the original owner, Mr. binding contract. The doctrine requiring the withdrawal to be known by the
Ignacio, made an offer to repurchase, but the bank sold the properties to third acceptor to be effective does not apply under the Civil Code's rule that
parties in August and October 1989. Ignacio claimed a repurchase agreement acceptance is effective only upon knowledge by the offerer.
was reached based on a letter from the bank's agent with his handwritten
notations and subsequent payments. Article 1324; Option contract

The Supreme Court ruled that no perfected contract of repurchase was Article 1324. When the offerer has allowed the offeree a certain period to
formed between Mr. Ignacio and the bank. Crucially, the acceptance must be accept, the offer may be withdrawn at any time before acceptance by
absolute; a qualified acceptance constitutes a counter-offer and rejects the communicating such withdrawal, except when the option is founded upon a
original offer. Ignacio’s notations on the bank's offer letter, proposing a consideration, as something paid or promised. (n)
different price and modified payment terms (including one dependent on his
“financial position”), amounted to a qualified acceptance or counter-offer. ★​ Contract of Option — A perfected contract based on an accepted
There was no evidence of the bank's authorized officers accepting this unilateral promise to buy or sell a determinate thing for a price certain,
counter-proposal, either in writing or through binding actions. The payments supported by valuable consideration distinct from the price. The
Ignacio made were found not to be conclusive proof of the bank's acceptance of optionee has the right, but not the obligation, to buy.
his terms, but rather likely related to sales where he acted as a broker. Thus, the
absence of an absolute acceptance or subsequent acceptance of the
°skm° - 1E
 Ang Yu Asuncion vs. Court of Appeals 238 SCRA 602 The contract
entered into was a lease agreement between the tenants and the Cu Unjiengs for Article 1331. In order that mistake may invalidate consent, it should refer to the
residential and commercial spaces. The problem arose when negotiations for substance of the thing which is the object of the contract, or to those conditions
the sale failed due to disagreement on the price and terms, and the owners later which have principally moved one or both parties to enter into the contract.
sold the property to Buen Realty Development Corporation for P15 Million on
November 15, 1990. The tenants sought to compel Ang Yu Asuncion, Arthur The Roman Catholic Church vs. Pante the contract entered into was a
Go, and Keh Tiong, could compel the owners, Bobby Cu Unjieng and Rose Cu Contract to Sell and to Buy a small, 32-square meter strip of land between the
Unjieng, to sell the property to them, having been granted a “right of first Roman Catholic Church and Regino Pante in September 1992. The problem
refusal” by a prior court judgment. The tenants argued this right allowed them arose when the Church later sold a larger property that included Pante's lot to
to buy the property at the price it was sold to Buen Realty another party, the spouses Rubi, in June 1994. The Church claimed Regino
Pante misrepresented himself as an actual occupant of the 2x16 meter lot,
The Supreme Court ruled that the “right of first refusal” granted by the which the Church asserted was a necessary qualification based on its policy and
courts was not a perfected option contract and could not, by itself, be enforced the principal reason it agreed to the sale. Regino Pante had sued after the
through a writ of execution compelling the sale. An option contract is a Church included his lot in a subsequent sale to the Spouses Rubi. The central
perfected agreement, distinct from the main contract. The doctrine of option dispute was whether the contract between the Church and Regino Pante was
contract requires an accepted unilateral promise to buy or sell a determinate voidable because the Church’s consent was allegedly vitiated by Regino Pante's
thing for a price certain, supported by a consideration distinct from the price. fraudulent misrepresentation.
Unlike an option, a right of first refusal does not have a fixed price or terms
finalized upon its grant; its exercise is contingent on the grantor's eventual The Supreme Court ruled that the Church's consent was not vitiated by
decision to sell and the terms later agreed upon with a potential buyer. mistake or fraud. The Court discussed the doctrine that a contract is voidable
Therefore, the tenants’ right was merely a “preparatory juridical relation,” and when consent is vitiated, but for mistake regarding a party's qualification to
the proper remedy for its breach was an action for damages, not specific invalidate consent, it must have been the principal consideration for the
performance against the new buyer, Buen Realty, especially since Buen Realty contract. The Court found that actual occupancy was not proven to be a
was not a party to the original case. necessary qualification or the principal reason the Church sold the lot,
considering its small size and use as a passageway. Evidence, including a
★​ Right of First Refusal — An innovative juridical relation. Not a sketch plan labeling the lot a “RIGHT OF WAY” and knowledge by its priest,
perfected contract of sale or an option under the Civil Code. Exercise suggested the Church was aware Regino Pante used it for access, not residency.
depends on the grantor's intention to sell and terms yet to be firmed up. Thus, the alleged misrepresentation did not constitute the type of mistake that
Breach cannot justify execution but may warrant damages. would invalidate the Church's consent. The Contract to Sell and to Buy between
★​ Consideration — An essential requisite of a contract. A valuable the Church and Regino Pante was held valid.
consideration distinct from the price is required for a binding option
contract. A contract is presumed to be supported by consideration. Lack Article 1335; Vitiation of consent; intimidation
of consideration makes a sale null and void ab initio.
Article 1335. There is intimidation when one of the contracting parties is
Article 1331; Mistake to invalidate consent compelled by a reasonable and well-grounded fear of an imminent and grave
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evil upon his person or property, or upon the person or property of his spouse, ★​ Deed of Extrajudicial Settlement of Estate — A document executed by
descendants or ascendants, to give his consent. heirs to settle the estate of a deceased person. Can include provisions
for the waiver and cession of shares in properties.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind. Articles 1345 & 1346; Simulation of contracts

★​ Vitiated Consent — Contracts entered into through mistake, violence, Article 1345. Simulation of a contract may be absolute or relative. The former
intimidation, undue influence, or fraud are voidable. Mistake as to a takes place when the parties do not intend to be bound at all; the latter, when
party's qualifications can vitiate consent if it was a principal reason for the parties conceal their true agreement. (n)
entering the contract. Such contracts may be annulled, a remedy
different from reformation. Article 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for
Mangahas vs. Brobio the contract entered into was a Promissory Note any purpose contrary to law, morals, good customs, public order or public
executed by Eufrocina A. Brobio promising to pay Carmela Brobio Mangahas policy binds the parties to their real agreement. (n)
₱600,000.00. The problem arose when Eufrocina failed and refused to pay the
amount due on June 15, 2003, claiming she was “forced” or intimidated into Simulated Contract — A contract that does not reflect the true intention of the
signing the note to get Carmela's signature for a tax requirement. Eufrocina parties. Simulated contracts are invalid or represent a different, hidden
alleged she signed the note because she desperately needed Carmela to agreement, which is not the same as correcting a written document that
countersign the Deed of Extrajudicial Settlement for a Bureau of Internal inaccurately reflects the intended agreement.
Revenue requirement and feared penalties for delay.
★​ Absolutely simulated contracts are void because parties do not intend
The Supreme Court ruled that Eufrocina A. Brobio's consent to the to be bound.
Promissory Note was not vitiated by intimidation. The Court found that being ★​ Relatively simulated contracts conceal the true agreement and bind the
pressured by a deadline or the possibility of tax penalties did not constitute the parties to the real agreement.
“imminent and grave evil” required by law to invalidate consent. Despite
feeling compelled, Eufrocina was not deprived of her free agency and even Lack of consideration or simulated price makes a sale null and void ab initio.
negotiated the amount from ₱1 million down to ₱600,000 before signing the Badges of simulation include lack of possession, non-payment of taxes, and
note. The execution of the Promissory Note was thus considered the result of a failure to assert ownership.
negotiation, not of vitiated consent. Therefore, the alleged circumstances
surrounding the signing did not amount to the legal definition of intimidation. Heirs of Dr. Intac v. Court of Appeals the contract entered into was a
Deed of Absolute Sale covering a property in Quezon City, executed by Ireneo
★​ intimidation vitiates consent only when one party is compelled by a Mendoza and Salvacion Fermin as vendors, and Mario Intac and Angelina Intac
reasonable and well-grounded fear of an imminent and grave evil upon as vendees, dated October 25, 1977. The problem arose sometime after Ireneo's
their person, property, or relatives. death in 1982 and Salvacion's death later, when respondents, daughters of
Ireneo, discovered in 1993 that the property title had been transferred to the
°skm° - 1E
Spouses Intac, leading them to claim the sale was fictitious and void. The Heirs
of Intac contended it was a valid sale for consideration. Respondents claimed Article 1358. All other contracts where the amount involved exceeds five
that the document was fictitious and intended only to allow Spouses Intac to hundred pesos must appear in writing, even a private one. But sales of goods,
use the title for a loan. chattels or things in action are governed by articles, 1403, No. 2 and 1405.
(1280a)
The Supreme Court ruled that the Deed of Absolute Sale was void due
to inadequate price, but because there was simply no consideration, and the Dauden-Hernaez vs. De los Angeles The contract entered into was one
contract was absolutely simulated. Where the price stated in the deed of sale for personal services between motion picture actress Marlene Dauden-Hernaez
was never actually paid, the contract is null and void ab initio for lack of and Hollywood Far East Productions, Inc., where she was to act as a leading
consideration. The doctrine that simulation occurs when parties do not intend to actress. The problem arose after she filed a complaint to recover payment of
be bound by their apparent agreement. In absolute simulation, the contract has P14,700. The trial court dismissed her case, citing that the contract was not in
no legal substance and is null and void from the start. This simulation was writing despite involving more than P500.000.
manifested by the Spouses Intac's failure to present proof of payment for the
property. Crucially, Ireneo and his family, the respondents, remained in The Supreme Court ruled that the lower court's dismissal of the
continuous physical possession of the property even after the alleged sale. The complaint on this ground was erroneous and demonstrated a “basic and
Spouses Intac also failed to exercise acts of ownership, such as collecting rents lamentable misunderstanding” of the law on contractual forms. Article 1358,
or demanding possession. These contemporaneous and subsequent acts requiring certain contracts like those involving amounts over P500 or
demonstrated that the parties’ true intention was not to transfer ownership but concerning real rights to be in a public document, does not render an oral
merely to lend the title for obtaining a loan. In this case, the courts found a deed agreement void or unenforceable; it merely grants the parties the right to
of sale void not merely compel each other to observe that form once the contract is perfected. Thus,
Marlene Dauden-Hernaez's oral contract for services was binding and
Articles 1356, 1357 & 1358; Form of contracts enforceable despite the lack of writing and the amount involved.

Article 1356. Contracts shall be obligatory, in whatever form they may have ★​ Contracts are generally valid and binding from their perfection
been entered into, provided all the essential requisites for their validity are regardless of form, whether oral or written, provided they possess the
present. However, when the law requires that a contract be in some form in essential requisites of consent, subject matter, and consideration.
order that it may be valid or enforceable, or that a contract be proved in a ★​ Form is only absolute and indispensable for validity or enforceability
certain way, that requirement is absolute and indispensable. In such cases, the when the law specifically requires it, such as in solemn contracts or
right of the parties stated in the following article cannot be exercised. (1278a) those under the Statute of Frauds.

Article 1357. If the law requires a document or other special form, as in the Article 1403; Unenforceable contracts; Statute of Frauds
acts and contracts enumerated in the following article, the contracting parties
may compel each other to observe that form, once the contract has been Article 1403. The following contracts are unenforceable, unless they are
perfected. This right may be exercised simultaneously with the action upon the ratified:
contract. (1279a)
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(1)​ Those entered into in the name of another person by one who has been ★​ Statute of Frauds — Contracts that the law requires to be proved by
given no authority or legal representation, or who has acted beyond his some writing (memorandum) of its terms for their enforceability by
powers; action in court. This applies to certain executory contracts, like sales of
real property or leases for longer than one year
(2)​ Those that do not comply with the Statute of Frauds as set forth in this ○​ Does not apply to contracts that are wholly or partly executed.
number. In the following cases an agreement hereafter made shall be ○​ Purpose is to prevent fraud and perjury.
unenforceable by action, unless the same, or some note or memorandum, ○​ Infringement is ratified by failure to object to oral evidence or
thereof, be in writing, and subscribed by the party charged, or by his agent; by accepting benefits.
evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents: Orduña vs. Fuentebella the central dispute revolved around a
(a)​ An agreement that by its terms is not to be performed within a year residential lot claimed by the Orduñas (petitioners) based on a prior verbal sale
from the making thereof; agreement and partial payments made to the original owner, Armando Gabriel
(b)​ A special promise to answer for the debt, default, or miscarriage of Sr., and his son, Armando Gabriel Jr. Gabriel Jr. subsequently sold the lot
another; through a series of transactions to respondents Bernard Banta, Marcos and
(c)​ An agreement made in consideration of marriage, other than a mutual Benjamin Cid, and finally Eduardo J. Fuentebella, who obtained a title. The
promise to marry; Orduñas sought to annul Fuentebella's title and reconvey the property, having
(d)​ An agreement for the sale of goods, chattels or things in action, at a occupied it for many years and paid taxes. The lower courts ruled the initial
price not less than five hundred pesos, unless the buyer accept and verbal sale agreement was unenforceable under the Statute of Frauds.
receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the The Supreme Court reversed, holding that the Statute of Frauds (Article
purchase money; but when a sale is made by auction and entry is 1403(2) of the Civil Code) applies only to executory contracts and not to those
made by the auctioneer in his sales book, at the time of the sale, of the that have been partially executed. The Court's doctrine is that where a verbal
amount and kind of property sold, terms of sale, price, names of the contract for the sale of real property has been partially performed through
purchasers and person on whose account the sale is made, it is a partial payments and transfer of possession, it is taken out of the scope of the
sufficient memorandum; Statute of Frauds. The acceptance of benefits under the contract, such as
(e)​ An agreement for the leasing for a longer period than one year, or for Gabriel Jr. accepting payments, also ratifies the agreement under Article 1405
the sale of real property or of an interest therein; of the Civil Code. The Orduñas' action for reconveyance was also considered
(f)​ A representation as to the credit of a third person. imprescriptible due to their possession of the property. The Court found the
subsequent buyers were not in good faith as they failed to inquire about the
(3)​ Those where both parties are incapable of giving consent to a contract. Orduñas' actual possession of the land.

★​ Fraud — Can vitiate consent and make a contract voidable. May also ★​ Lesion — inadequacy of price in the sale or exchange of immovable
lead to liability for damages. Actual fraud can be a ground for review property
of a decree of registration within one year. Fraudulent concealment. ○​ a perceived inadequacy of price is not a sufficient ground for
Fraudulent conveyance. setting aside a sale that was freely entered into. Similarly, a
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 contract would generally not be invalidated merely because the inclusion of the land in Garcia's title null and void and ordered it registered in
consideration is inadequate. Hernandez's name.

★​ Exceptions: Fernandez vs. Court of Appeals the central dispute involved petitioner
○​ Inadequacy of price might be a ground for setting aside a sale if Celso A. Fernandez, the lessee, and respondent Miguel Tanjangco, the lessor,
the inadequacy is shocking to the conscience. concerning the interpretation of the renewal clause in their Contract of Lease
○​ A contract would be invalidated if the inadequate consideration over land for the New Zamora Market. The clause stated the lease, ending July
is coupled with factors such as fraud, mistake, or undue 1, 1983, was “renewable for another ten (10) years at the option of both parties
influence. under such terms, conditions and rental reasonable at that time.” Fernandez
○​ Incomplete payment of the purchase price is different from attempted to renew the lease unilaterally, claiming a prior verbal assurance
inadequacy of price and can be a ground to rescind an from Tanjangco, but Tanjangco refused, insisting mutual agreement was
otherwise valid and enforceable contract. required. Fernandez sued to compel renewal, but the Court of Appeals reversed
the trial court's ruling that favored Fernandez.
Hernandez vs. Court of Appeals the contract at issue was an agreement
regarding the boundary line between adjacent properties owned by Hernandez The Supreme Court agreed with the Court of Appeals, holding that the
and Fr. Garcia. Victorino Hernandez challenged Fr. Garcia's land registration contract language clearly required the mutual option and agreement of both
application, filed in 1959, which included a 220-square meter area that parties for renewal. Regarding the alleged verbal assurance of renewal by the
encroached upon Hernandez's land, despite a previous agreement and visible lessor, the Court ruled that such an alleged verbal assurance was unenforceable
markers defining their boundary. Hernandez claimed was fraudulently included under the Statute of Frauds. The doctrine discussed is that the Statute of Frauds
in Garcia's application and belonged to him. The properties were adjacent and (specifically Article 1403 (2)) requires certain agreements, including verbal
once owned by the same person, with government surveyors having previously assurances related to lease renewals for more than a year, to be in writing to be
set monuments along a boundary line agreed upon by Hernandez and Fr. Garcia enforceable by action. Therefore, Fernandez could not rely on a verbal claim to
in 1956. Hernandez argued he was misled because the plan supporting Fr. compel the renewal against the clear terms of the written contract.
Garcia's application disregarded the agreed boundary and existing monuments,
falsely designating other lines. Respondents attempted to rely on the Statute of Vda. De Espina vs. Abaya the central dispute involved petitioners
Frauds. Simprosa Vda. de Espina and some of her children seeking partition of four
parcels of land from the estate of Marcos Espina against private respondents
However, the Supreme Court ruled that the Statute of Frauds was Sofia Espina and Jose Espina, who were other heirs. The respondents alleged a
inapplicable to this case, which pertains to an agreement about the boundary of prior verbal division or oral partition agreement among the heirs and Marcos
estates, not a lease over a year or a sale of real property or interest therein under Espina and his widow, under which Sofia and Jose had taken possession of
Article 1403(2)(e) of the Civil Code. The Court discussed that the Statute of specific portions, obtained titles, and made payments to Simprosa, arguing
Frauds requires certain contracts, like those for the sale of real property, to be in prescription. The petitioners argued this alleged oral partition was invalid and
writing to be enforceable by action, but this formality was not required for the unenforceable under the Statute of Frauds because it involved land.
boundary agreement here. Hernandez's testimony about the boundary
agreement with Fr. Garcia was admissible. The Court ultimately found the
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 The Supreme Court upholding the finding that the action was one for the impression that the facts are inconsistent with those which
title barred by prescription (respondents claimed exclusive ownership and the party subsequently attempts to assert.
possessed the property for over twenty-one years), and ruled that the Statute of (2)​ Has the intent, or at least expectation, that his conduct shall at
Frauds did not apply to the oral partition agreement. The Court ruled that the least influence the other party.
Statute of Frauds has no operation in agreements for partition among co-owners (3)​ Has knowledge, actual or constructive, of the real facts.
or heirs. This is because a partition is viewed not as a conveyance of property
requiring written form under the Statute, but merely a “segregation and For the party claiming the estoppel, the essential elements are:
designation of the part of the property which belong to the co-owners.” Because (1)​ Has lack of knowledge and of the means of knowledge of the
partition has this nature, the Statute of Frauds does not apply to agreements for truth on the facts in question.
partition, even if made verbally. (2)​ Has relied, in good faith, on the conduct or statements of the
party to be estopped.
★​ Void Contracts — Contracts that are non-existent or without legal (3)​ Has acted or refrained from acting based on such conduct or
effect. Unconscionable contracts or those whose validity is left solely to statements as to change the position or status of the party
one party may be void. claiming the estoppel, to his injury, detriment or prejudice.
★​ Voidable Contracts — Contracts where consent is vitiated by mistake,
violence, intimidation, undue influence, or fraud. Binding unless
annulled by court action. Susceptible of ratification.

Estoppel — A principle that precludes a party from asserting a position or right

inconsistent with their previous conduct, statements, or agreements. It can bar
issues raised for the first time on appeal.
○​ a party should not be allowed to repudiate their own past
actions, representations, or silence when such actions have led
another party to change their position for the worse.
○​ The essence of estoppel and laches is described as the failure or
neglect for an unreasonable length of time to do what should
have been done, warranting a presumption that the right has
been abandoned.

★​ Estoppel in Pais is also equitable estoppel involving both the party to

be estopped and the party claiming the estoppel.

For the party to be estopped, the essential elements are:

(1)​ Commits conduct amounting to false representation or
concealment of material facts, or at least calculated to convey
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